Arbuthnot Banking Group (LON:ARBB) Chief Executive Officer Andrew Salmon and Chief Financial Officer James Cobb caught up with DirectorsTalk for an exclusive interview to discuss the core businesses within the group, profit increase, time lag in deposit pricing, commercial banking, specialist lending divisions, future growth, and dividend payments.
Q1: Andrew, if I can just start with yourself. What can you tell us about Arbuthnot Banking Group’s businesses?
A1: At the core is full relationship banking for private clients and small, medium-sized enterprises.
What do we mean by full banking relationship? We provide transactional, current accounts, we take deposits, we lend money.
On the private banking side, we also have a wealth management business that provides the financial planning advice and then investment and manage the investments. On the commercial side, as well as running transactional accounts for small businesses, we provide both deposits and loans. We then have three subsidiary companies which are all specialist commercial finance businesses:
One is Asset Finance, specialising in classic and high-value cars called Renaissance Asset Finance. The other is Arbuthnot Commercial Asset-Based Lending, which at its core is an invoice discounting business. The third is a business that we bought during the pandemic called Asset Alliance, which is one of the UK’s leading independent truck leasing businesses, owning about 4,000 trucks. A little known fact about Arbuthnot Latham is that in that portfolio, we also own about 8% of London’s buses.
We’ve been growing the business very strongly since within the group, we sold our other bank, Secure Trust Bank, and put the capital into Arbuthnot Latham, such that it’s now got nearly 10 times as much capital as it had about 7/8 years ago. It’s grown very fast.
We’ve invested in technology such as we’ve probably got as modern technology as any bank in the UK would have. But at the core, to really understand Arbuthnot, is what we offer the clients is relationship and service.
What’s happened in the banking world is most banking is provided by huge banks, multinational banks employing hundreds of thousands or tens of thousands, if not hundreds of thousands of people. In that world where the service is being mainly delivered by technology, we have the first class technology, but we also provide a person for our clients to deal with. And that is proving a winning formula.
James will later go through the numbers and how the business has become bigger and much more profitable. But at the core is what we offer is going extremely well in an era when more and more people are being told they can’t have a relationship with their bank. They’re turning, once they’ve heard of us, where they get the relationship and service and modern technology.
Q2: James, how does this all then fit together as a business model?
A2: So, as Andrew was describing, at the middle of the business is the core bank and importantly was the relationship and service that we provide and most importantly is that customers and clients are bringing us deposits. These are mainly transactional deposits and therefore they are priced at a much lower rate than you would see in the best buy tables. So we’re able to raise deposits at a more competitive price than most of the other niche banks that are funded mainly off the best buy tables.
We then take these relationship deposits and we lend them out, as Andrew said, through our specialist niche lending, which is mainly secured and therefore safer in terms of credit risk. But we are able to get higher margins than we would do in the normal traditional private banking sectors.
Q3: Andrew, I see that you doubled your profits in 2023. Was this due to higher interest rates?
A3: Many people have attributed it to that and they’re right in the sense that higher interest rates and rising interest rates in particular helped our profitability. But it’s the business model that James has just been talking about that enabled us to take advantage of rising interest rates because we’ve got this relationship banking model where not many other banks are competing in what’s called the best buy tables to raise their deposits. So they’re paying more and more for the deposits where in our business the client gets a good deposit rate but also gets a service and relationship which gives us a much deeper amount of liquidity at a price which enables us to make a better net interest margin.
So interest rates helped but the real help was that over the last 10 years we’ve developed a very strong relationship model and Arbuthnot Latham is therefore well positioned for the future era of higher interest rates.
I think people are expecting interest rates to come down but they’re not expecting them to come down to 10 basis points again as they settle at somewhere between 3 and 4. That will be a good place for our business model.
Q4: James, you mentioned in the results the time lag in deposit pricing but what does that actually mean?
A4: So, as we’ve just talked about, is that we raise deposits from our customers and clients and they are generally broken up into three main categories. First of all we’ve talked about transactional deposits. Those transactional deposits have very very low interest rates paid on them as you would expect in current account transactional banking. There are another two types of deposits. Notice and time.
Most of these are then split into whether they are referenced or linked to a base rate or they are in fact fixed. Fixed terms normally are between one and three months or out as far as 12 months typically so as rates rise, and we saw this over the last 18 months, those deposits are fixed at the rate that they were agreed at the time that the deposit was put on and they can’t be changed until they mature. So as these deposits have been maturing, they are then being repriced to the new current higher rate. Therefore it takes about 12 months for our deposit book to reprice itself over time and as a result we’ve enjoyed the higher interest rates have helped us with that time lag.
In reverse as interest rates will go down, we have the same effect of a lag as the deposit book repricing on the way down.
Q5: Now, commercial banking seems to be growing very nicely. What do you put this down to Andrew?
A5: Well, we moved into commercial banking about seven years ago because we wanted to broaden the business. We have a philosophy of diversity, there’s great strength in diversification, so we thought if we had a commercial bank operating alongside a private bank you’ve got a more diverse business.
We took the principles of private banking which is service and relationship into the commercial banking world and I think we underestimated how well that would be received because if you’re finance director of a small business, the larger banks have decided that you can be dealt with by a call centre and online banking.
Actually the small businesses probably need more looking after than private individuals. Private individuals may have a life event every few years. They get married, they might get divorced, they have children, they retire and they want to talk to their banker but the finance director wants to talk on quite a frequent basis to his banker and that is something he’s denied in a lot of other places.
So, we really have had a strong stream of business coming to us and it’s not just service and relationship. We have invested in big tech, we have an Oracle banking platform, we have a Salesforce client relationship management system, these are these are some of the leading data and tech companies in the world. So, they get the clients, small businesses get that technology but they get someone to talk to as well and I really put it down to it even in this technological world people still want a relationship bank.
Q6: Big banks are deemed too big to fail really, how does that affect you, James?
A6: So, as we observed in the financial crisis and again since, the main problem that banks have faced is that they’ve run out of liquidity i.e. their depositors want to take their money away quicker because they’re slightly worried about the state of that bank. As a result of that we take our liquidity and our liquidity reserves extremely cautiously and very seriously.
One of the rules that we that we put into play is that we don’t really take any funding from the wholesale markets which are the first to dry up so therefore we only take deposits from the retail and our very small commercial customers. Once we’ve received those deposits, as a rule we only lend out 60% of those deposits to our borrowing customers and as a result the 40% that we keep behind we put in highly liquid instruments that we hold at the Bank of England that are available immediately to pay back our depositors when they such as they require it.
If you were to take a calculation under the regulatory rules and to look at how much the regulators would require us to hold for our deposit book, we tend to target at least twice the amount of the minimum that they would ask us to do. This gives us a huge safety cushion for the way that we operate the bank.
Q7: Now by the end of April 2024, your specialist lending divisions had already grown by 7%. Andrew, are you focusing on this now?
A7: Yes, I think a particularly interesting aspect of Arbuthnot Latham is these three specialist lending businesses, two of which we’ve effectively grown from scratch and asset alliance we bought when it was quite a bit smaller. These businesses lend at a higher interest margin than our core business so the more we grow them on average the greater our net interest margin comes across the business. So, it should fundamentally provide the diversification in lending we need, but more importantly the growth in profitability on our lending.
All three businesses can be seen in the results to have grown significantly and in a sense, they’ve reached a scale where it should be easier to grow them even further.
Q8: James, growth over the last 10 years has been over 20% per year, how do you see the future now?
A8: As Andrew mentioned in his opening, we have been growing Arbuthnot Latham Bank very quickly since we took the capital that we raised from the sale of our other bank, Secure Trust. This has given us the firepower to grow the business by exactly over 20% per year on a compound basis. I’m not sure that we’re going to continue to grow at that extraordinary rate, but we do see good growth for the future and we have developed a future strategy of how we’re going to develop the business over the medium term.
Currently our total footings, and that would be the sum of our deposits, our loans, and our assets under management, are approximately £8 billion and we’re targeting to grow that to about £10 billion probably over the next three to five years.
Q9: Finally, Andrew, I see that you’ve recently declared a special and interim dividend. What is your general approach to dividends?
A9: Arbuthnot Banking Group has , as you say, recently, and in fact shareholders received this month, both a special and an interim dividend totalling 40p.
Our general approach is that we like to consistently grow our dividends and people can look back at generally each year the dividend that they’ve all grown by one or two pence per year. And then every so often it’s an event where we’ve made more profit than we might usually make, we normally include the shareholders in that success and add to that a special dividend.
