Arbuthnot Banking Group Plc (LON:ARBB) has announced a half yearly profit before tax of £20.8m.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited.
FINANCIAL HIGHLIGHTS
| ● | Profit before tax of £20.8m for the six months to 30 June 2024 (30 June 2023: £26.4m), as expected, as existing fixed rate deposits have continued to reprice onto higher terms as they are renewed. |
| ● | Underlying profit before tax of £20.8m (30 June 2023: £29.3m)*. |
| ● | Earnings per share of 94.6p (30 June 2023: 129.4p; 31 December 2023: 222.8p). |
| ● | CET1 capital ratio of 11.6% (30 June 2023: 12.2%; 31 December 2023: 13.0%) and total capital ratio of 13.6% (30 June 2023: 14.5%; 31 December 2023: 15.2%). |
| ● | Interim dividend of 20p per share previously announced and already paid in June (30 June 2023: 19p per share). |
| ● | Special dividend of 20p per share previously announced and already paid in June. |
| ● | Net assets per share at 30 June 2024 of £15.75 (30 June 2023: £14.70; 31 December 2023: £15.47). |
OPERATIONAL HIGHLIGHTS
| ● | Customer loans (including leased assets) increased by 3% to £2.40bn (30 June 2023: £2.25bn; 31 December 2023: £2.33bn) increased by 3% in the first half of the year, representing a 7% increase year on year. |
| ● | Specialist Lending Divisions’ loan balances grew by 12% in the first half of the year, and 29% year on year to £861.1m (30 June 2023: £669.0m; 31 December 2023: £768.5m). |
| ● | Customer deposits of £3.9bn (30 June 2023: £3.3bn; 31 December 2023: £3.8bn), a 3% increase since the year end and a 19% increase year on year. |
| ● | Lower cost Commercial transactional deposits saw annualised growth of 19% to £1.14bn (30 June 2023: £0.96bn; 31 December 2023: £1.05bn), as the Group’s strategy to grow these balances gathered momentum. |
| ● | Funds under management and administration of £1.96bn at 30 June 2024 (30 June 2023: £1.38bn; 31 December 2023: £1.71bn), a 15% increase against 31 December 2023 and an increase of 43% year on year, with net inflows showing a four-fold increase on the first six months of 2023. |
Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot Banking Group, said: “The Group made good progress in the first half of the year, again delivering strong profits in an evolving interest rate environment.
The balance sheet evolution and growth achieved in the period demonstrates the ongoing success of our ‘Future State 2’ strategic plan, with its focus on diversifying the loan book whilst continuing to enhance our value proposition to relationship clients.
While an expected fall in interest rates in the second half will have a short-term impact on profit growth, the Group is well positioned to take advantage of the market opportunities we anticipate over the near, medium and long term.”
Chairman’s Statement
I am pleased to report that the Group has recorded a profit before tax for the first six months of the year of £20.8m, compared to £26.4m in the same period last year.
The reported profit is lower, as expected, due to the previously explained time lag between rises in the Bank of England base rate and the ageing of the existing fixed rate deposits. It takes 12 months for the cost of our deposits to rise to their resting rate.
This has been the case during the first half of 2024 with the average cost of deposits being 3.19% compared to 1.92% in the same period in the prior year. This increase when applied to customer deposit balances in excess of £3bn, has increased the cost to the Group by £35.2m, being the main reason for the reduction in profits in the first half of 2024. This trend will continue into the second half.
As previously set out in the strategic plan “Future State 2”, the Group is focussed on diversifying the loan books by increasing the proportion represented by the specialist lending divisions.
This continued with success in the first half, with the specialist divisions reaching £861.1m of lending balances, which is growth of 12% during 2024 and 29% in the last 12 months. This now represents 36% of the total lending portfolio compared to 30% in June 2023.
The success the Bank had in growing relationship deposits continued into 2024. As expected, we saw the usual seasonal outflow of balances as tax payments were made by clients. We also encouraged non-relationship, expensive fixed term deposits to mature away from the Bank, without competing on price to retain these balances. Finally, we marketed an investment opportunity for our Private Banking clients to earn higher returns through a gilt investment product. In combination, the impact of these three factors resulted in a reduction in deposits of £235m.
However, despite this, total deposit balances have increased by £103.6m or by 3% since the start of the year and by 19% since June 2023. As part of the strategy to grow our deposit base, we have been focussing on the underserved SME current account market, where we have found that private bank style client service resonates well with the finance professionals of our commercial clients. So much so that the transactional SME deposits grew by £121m in the first half of 2024, an increase of 9% and nearly 20% from the prior year.
I would also like to draw attention to the performance of our Wealth Management division. Many wealth managers across the sector are struggling to grow organically, but we continue to make great strides, growing our Funds Under Management and Administration in the first half by £256m, an increase of 15% and 43% since the prior year.
As previously indicated, I was pleased that we were able to complete the renewal of our subordinated loan with P Capital Partners at the beginning of June. This will ensure that the diversity and strength of our regulatory capital base remains robust. We are delighted that our relationship with P Capital Partners has been extended and value that they share the vision we have for the prospects of the Group.
Reflecting on the success that the Group has enjoyed over the past 18 to 24 months, the Board of directors considered that our shareholders should be rewarded for their loyalty by declaring a further special dividend of 20p per share, which was paid on 20 June.
At the same time, the Board announced the interim dividend for the year, which was also 20p per share, an increase of 1p per share over the prior year interim dividend. This was paid on the same day as the special dividend.
On 2 July we announced Richard Gabbertas was joining the Board of ABG, having already served for over three and a half years on the Board of our bank, Arbuthnot Latham, where he was previously the Chair of the audit committee and had recently become the Chair of the risk committee. I am delighted to welcome him to our Board and wish him well for his future tenure.
Banking
Net client growth across Private and Commercial Banking has increased year on year following the investment into new segments over the last 12 to 18 months. Total deposits grew 3% from the year end and 19% over the previous twelve months to finish the period at £3.9bn.
Private Banking deposits seasonally reduced in the first quarter due to client tax payments. However, client growth and acquisition has led to balances being largely replenished over the second quarter to finish the half year at £0.95bn.
The strategy continues to focus on low-cost relationship deposits. Commercial Banking deposits increased across a wide spread of target segments with growth of 30% over a twelve-month period. Conversely, non-relationship balances have reduced as these were more expensive to maintain.
The Banking loan book finished the half year with loans of £1.54bn, flat compared to the previous twelve months and year end. Lower than expected repayments over and above contractual repayments, coupled with on-plan gross lending, has led to higher lending balances generating higher interest income throughout the period, which has only been partially offset by a higher interest expense.
Loan book quality remains strong given the macroeconomic environment. The Bank’s cautious underwriting approach with low LTVs is resulting in new defaults being exited with little or no loss.
Wealth Management
Funds Under Management and Administration at the end of June were £1.96bn, up 15% from the start of the year and growth of 43% year on year (30 June 2023: £1.38bn).
Year to date gross inflows were £247m compared to £116m over the same period last year, of which a third were from existing clients and two thirds from new clients. Net flows for the period were £170m, representing a four-fold increase versus the same period in 2023. Additionally, the Direct Gilt Service, launched in February 2024, has raised £82m across twenty-one portfolios.
Arbuthnot Commercial Asset Based Lending (ACABL)
ACABL reported a profit of £4.4m (30 June 2023: £4.0m) and finished the first half with a loan book of £263.8m, compared to £241.1m for the same period in the prior year and £239.8m at the year end.
ACABL has continued to support existing clients with renewals, additional facilities and acquisitions, particularly where clients have a buy and build strategy. However, macro-economic inflationary pressures, and the higher interest rate environment along with ongoing supply chain challenges have resulted in a reduction in the number of event-driven transactions and fewer Private Equity backed buy-outs in early 2024. However, at the half the year, the business is seeing signs of improving market conditions with falling inflation and the prospect of lower interest rates on the horizon.
The business continues to observe a higher number of watch cases compared to prior years. However, the loss rate remains very low due to the high quality, liquid assets, as well as close monitoring of the collateral.
Renaissance Asset Finance (RAF)
RAF reported a profit of £2.2m (30 June 2023: £0.7m) and finished the first half with a loan book of £234.3m, equating to annual growth of 49% when compared to £156.7m for the same period in the prior year and 18% up from the year end (31 December 2023: £198.8m). In the month of June the business generated profit before tax in excess of £0.5m for the first time.
The business continued to broaden its offerings in the wholesale funding sector whilst developing a specialist finance portfolio, securing new and additional funding through block discounting facilities and revolving credit facilities to businesses with successful track records, with Block Discounting balances of £30.9m following the launch of the business in late 2021.
Asset Alliance Group (AAG)
AAG reported a profit before tax of £25k (30 June 2023: £2.5m loss). Whilst the business has only just achieved break even, this is partly caused by the stage of development of the business, whereby since acquisition we have more than doubled the size of the fleet in a short period of time. The benefit of this will mainly be felt as the portfolio matures.
As at 30 June 2024 the business had assets available for lease and finance leases totalling £363.1m (30 June 2023: £258.8m) with growth of 11% since the year end and 40% over the previous 12 months.
Despite the current economic headwinds, AAG has generated a strong flow of originations in the 6 months to 30 June 2024. Yields, whilst under pressure in certain areas, have improved in others, with an average yield on new business of 8.2% for the first half of the year.
All new assets delivered for the new Bus Rental Division are being fully utilised with current yields in excess of 10%. The Commercial Vehicle sector is experiencing high levels of customer uncertainty coupled with significant pricing pressure from competitors; however, larger, stronger fleets confirm to be targetting annual fleet replacements.
Trading for used truck sales remains challenging. Margins have tended to be maintained, although demand and stock turnover has yet to fully recover from the post-Covid lull.
Operations
The Bank has continued to see good momentum in pursuing its strategy for client growth in its target markets. Net new client growth was 3% compared to the year end with a trend towards larger and more complex commercial clients.
Total number of card app users is 25% higher than the same period for the previous year and the total number of transactions through Apple Pay and Google Pay increased by 131% year on year.
The Bank continues to develop its digital roadmap to improve the customer experience and organisational efficiency, including progress in upgrading and transforming the Bank’s online and mobile banking offering.
Outlook
We now have a new Labour government, and we await to hear how its plans will be implemented. While the outlook for this remains uncertain, we believe there will be opportunities that we remain well positioned to benefit from.
It is expected that interest rates will start to fall from their current highs, and as disclosed, this will inevitably have a short-term impact on our profits. However, we remain focussed on implementing our growth strategy and we are fortunate to have more than sufficient market opportunities to continue to deliver on this.
