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Arbuthnot Banking Group PLC
05 October 2022
5 October 2022
Arbuthnot Banking Group PLC
Third Quarter 2022 Trading Update
The Board of Arbuthnot Banking Group PLC ("Arbuthnot", "the
Company" or the "Group") is today issuing the following update
regarding the trading performance of the Group for the three months
to 30 September 2022.
Highlights
-- Bank of England base rate rises contribute to increased revenue
-- Good progress being made across all divisions
-- Deposit balances exceed GBP3bn in the quarter
-- Completion of the sale of King Street property progressing
-- Full year results expected to be ahead of market expectations
Group Performance
The Group has traded well in the third quarter of the year and
further increases in the Bank of England base rate ("base rate")
have continued to drive the increased profitability of the
Group.
In September the underlying monthly profit before tax was
approaching GBP4m (excluding the one-off cost of living bonus
payment made to all employees that was signalled in the Group's
Interim results released on 19 July 2022). Any future base rate
increases will continue to have a corresponding positive impact on
the Group's revenue, as approximately GBP2.6bn of the Group's
assets (loans and liquidity assets) have variable interest rates
linked to the base rate. Accordingly, the Board expects that both
reported and underlying profit for the year ending 31 December 2022
will be ahead of market expectations. *
However, as referenced in the interim statement, it should be
noted that at this current time, the Group is experiencing higher
net interest margins than it expects over the longer term; the
repricing of deposits generally has a delay of up to twelve months
as time deposits reach maturity. Also, the Group is yet to see the
full impact of the inflationary pressures that are currently
working their way through the economy.
During the quarter, deposit balances of Arbuthnot Latham &
Co., Ltd ( "the Bank"), exceeded GBP3bn for the first time in the
Bank's history, as our deposit gathering model continued to prove
successful. As expected, the cost of deposits is beginning to rise
and is now in excess of 81 basis points ("bps"), but this compares
favourably with the current base rate of 2.25% and also proves the
value of developing a relationship-based deposit platform rather
than relying on "best buy" deposits, which are currently seeing
one-year rates reaching over 4%.
Our liquidity remains robust with the Bank having surplus liquid
assets of more than GBP411m above the minimum regulatory
requirement of GBP565m. The Group remains well capitalised, and
this is expected to strengthen given the improved
profitability.
The Group's loan balances have increased to GBP2.2bn. However,
given the current market uncertainty, we have tightened our credit
appetite, particularly in our real estate lending business. We are
now stressing the affordability of interest payments to levels in
excess of the 2% increase in rates that is prescribed. The effect
of this will be to reduce the loan to value ("LTV") on our new
lending below our guidance of 60%. It is also expected that this
change in appetite will reduce our lending volumes in the short
term. However, given our increased levels of profitability, we are
content to save our financial resources for future opportunities
that will arise given the market dislocation.
In the current economic environment, it is likely that the risk
of defaults will increase across the economy; however, the Group
continues to maintain its long held credit principles and
discipline. Currently, the non-performing loan book has been
reduced to its lowest level for over two years and there are no
signs of material stress in the credit metrics. The average LTV
against the loan book remains low at 51%, giving significant levels
of security to withstand and minimise the effect of any potential
falls in property markets.
The Group's economic scenarios incorporated into its IFRS 9
expected credit loss modelling have been revised to consider the
current negative outlook and future economic climate. However,
despite the potentially worsening macro-economic outlook, the
increase in expected losses is limited due to the high levels of
property-based security.
Business Division Highlights
Banking
Client acquisition in the third quarter continued the strong
trend seen in the first half of 2022 of double-digit growth across
all the key markets. Given the economic outlook, combined with its
conservative business model, the Bank's proposition resonates well
with clients seeking a bank that can provide support throughout the
economic cycle along with building long term relationships. This
was reinforced with a strong Net Promoter Score (NPS) achieved in
2022 of 64% across Private & Commercial Banking.
Banking has generated good liquidity for the Group through its
deposit raising strategy with a significant proportion of
relationship call and current deposits raised, which tend to be
priced lower. The cost of deposits is expected to increase market
wide given the outlook; however strategically the business views
this as an opportunity to continue to win and retain further
relationship deposits.
The loan book growth for the third quarter has been broadly flat
with repayments offsetting new lending. The transition to more
efficient use of capital continues as capital intensive lending
matures and refinances away to other lenders and is replaced with
more capital efficient lending. The last quarter of 2022 is
expected to deliver modest loan book growth as clients defer
transactions given the interest rate outlook and the impact of
increased financing costs. The business remains committed to its
long-held credit disciplines and conservative approach to lending,
and given the economic and interest rate outlook, the Bank is well
positioned to take advantage of opportunities and to support new to
Bank clients where the credit risk is low and the competition are
distracted.
The changing macroeconomic environment is yet to impact the
Bank's loan quality, with watchlist cases reducing to below
pre-pandemic levels in absolute terms, despite the larger loan
book. As clients potentially experience increased pressure, the
Bank's conservative lending appetite, reflected in low loan to
values across the book, means it is able to work with clients who
face the prospect of increasing interest rates.
Wealth Management
In the third quarter, despite the global financial market
headwinds, Assets under Management ("AUM") achieved their highest
ever level to finish August at GBP1.37bn. However, subsequently
significant market volatility in September negatively impacted AUM
levels to finish the quarter at GBP1.35bn. The effect of the falls
in the markets was partially offset by Sterling's weakness and the
Investment Committee's underweight allocation to UK Gilts.
Gross client inflows have been maintained with a high volume of
criteria clients rather than being dominated by a smaller number of
high value clients.
The Investment Committee maintains a cautious outlook on
financial markets, expressed through an underweight to equities and
fixed income, and cash holdings higher than normal providing the
business the option to take advantage should market volatility
increase.
Mortgage Portfolio
The mortgage portfolio continues to operate in line with
expectation. There has been an incremental number of arrears as
borrowers feel the effect of rising costs and interest rates.
The portfolio was acquired in August 2019 with a discount
against par of 2.7% which is being unwound over the life of the
portfolio. Currently the outstanding balance of the loans is
approximately GBP163m with the remaining discount in excess of
GBP4.6m. This coupled with a low average LTV of 69%, means the
Bank's exposure to adverse economic headwinds is minimised.
Arbuthnot Commercial Asset Based Lending ("ACABL")
Despite the challenging market conditions, ACABL continues to
experience strong lending growth with GBP55m of new client
facilities issued in the third quarter, a record for the
business.
The loan book growth was marginally offset by attrition where
ACABL supported clients to successful sales and the facilities were
repaid. The impact from the pandemic and Private Equity sponsors
retaining assets for longer has meant the business is seeing lower
levels of attrition than it would ordinarily expect.
In the current environment, and as the loan book grows the
business would expect to see an increase in the number of clients
that are being closely monitored. However, ACABL's business model
which relies on high levels of liquid security, and close
monitoring of cash flows and asset books used as security, means
any potential problem debts can be actively managed in advance of
incurring any losses. This is the standard methodology for
mitigating credit risk in this industry.
After the closures of the RLS 2 scheme, ACABL was successful in
being accredited for the government backed RLS3 scheme with its
first loan drawn in September.
Renaissance Asset Finance ("RAF")
RAF continues to experience strong demand for its asset finance
facilities, with the successful launch of its Block Discounting
business. The business delivered strong growth in the third quarter
with a record amount of new lending in the month of July.
Loans under forbearance measures following the pandemic remain
largely static and confined to the London purpose-built taxi
market.
Asset Alliance ("AAG")
AAG has reported three consecutive months of net growth in its
leased asset portfolio with a strong pipeline into the first half
of 2023. The global supply chain issues still affect the
availability of new vehicles; however, the business has seen
reasonably consistent progression and improvement month on
month.
The reduced supply of new assets however has resulted in a
reduction in overall discounts achievable as the global truck
suppliers have opted to chase the more lucrative retail sector,
resulting in less favourable terms to larger fleet buyers. However,
being part of the Group and having access to a robust and reliable
source of funding, AAG has been favoured ahead of many of its more
financially challenged competitors allowing it to retain and commit
to its supply agreements with the major truck and trailer
suppliers.
The used truck sales market remains buoyant, in part due to
global supply chain issues and the inflationary economy continuing
to drive up residual values for assets resulting in increased
profits on disposals.
The commercial vehicle portfolio remains centred around
essential supply chain logistics businesses. Consequently, there
has been no material increase in arrears or default positions.
Where historically the Bus & Coach business was brokered out
to other lenders, AAG has successfully transitioned to retain the
business on its balance sheet. During the third quarter, own book
lending in this sector increased by over GBP20m, which was helped
by an acquisition of a portfolio totalling GBP16m of operating
leases. This was completed at a 6% discount to the future cash
flows receivable.
Arbuthnot Specialist Finance ("ASFL")
ASFL continues to make progress implementing its new business
plan. The loan book remains in line with the balance as at 31
December 2021.
Owned Properties
The Group expects to complete the sale of its King Street
property, originally announced on 20 July 2022, in the near
future.
The sale was part of the previously announced strategy to exit
non-core assets to focus the Group on optimising its capital
utilisation, with the disposal releasing GBP8.4m of capital which
will be available to be deployed in line with the Bank's strategic
"Future State" plan.
*The Company believes that consensus market expectations for the
year ending 31 December 2022 are reported pre-tax profit of GBP13
million
The Directors of the Company accept responsibility for the
contents of this announcement.
The information contained within this announcement is deemed to
constitute inside information as stipulated under the retained EU
law version of the Market Abuse Regulation (EU) No. 596/2014 (the
"UK MAR") which is part of UK law by virtue of the European Union
(Withdrawal) Act 2018. The information is disclosed in accordance
with the Company's obligations under Article 17 of the UK MAR. Upon
the publication of this announcement, this inside information is
now considered to be in the public domain.
Enquiries:
Arbuthnot Banking Group
Sir Henry Angest, Chairman and Chief Executive
Andrew Salmon, Group Chief Operating Officer 020 7012
James Cobb, Group Finance Director 2400
Grant Thornton UK LLP (Nominated Adviser and
AQSE Exchange Corporate Adviser)
Colin Aaronson
Samantha Harrison
George Grainger 020 7383
Ciara Donnelly 5100
Shore Capital
Daniel Bush
David Coaten 020 7408
Tom Knibbs 4090
H/Advisors Maitland (Financial PR) 020 7379
Sam Cartwright 5151
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END
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