REG - Arbuthnot Banking - Third Quarter 2022 Trading Update

Arbuthnot BankingAnnouncement

05/10/2022 09:34

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RNS Number : 7739B  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 £3bn 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 £4m
(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 £2.6bn 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 £3bn 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 £411m above the minimum regulatory requirement of £565m. The Group
remains well capitalised, and this is expected to strengthen given the
improved profitability.

 

The Group's loan balances have increased to £2.2bn. 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
£1.37bn.  However, subsequently significant market volatility in September
negatively impacted AUM levels to finish the quarter at £1.35bn.  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 £163m with the remaining
discount in excess of £4.6m. 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 £55m 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 £20m, which was helped by an acquisition of a portfolio
totalling £16m 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 £8.4m 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 £13 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   020 7012 2400

 Andrew Salmon, Group Chief Operating Officer

 James Cobb, Group Finance Director

 Grant Thornton UK LLP (Nominated Adviser and

 AQSE Exchange Corporate Adviser)                 020 7383 5100

 Colin Aaronson

 Samantha Harrison

 George Grainger

 Ciara Donnelly

 Shore Capital                                    020 7408 4090

 Daniel Bush

 David Coaten

 Tom Knibbs

 H/Advisors Maitland (Financial PR)               020 7379 5151

 Sam Cartwright

 

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