Arbuthnot has now released their interim results for the year ending 2017.
Interest income increased by £6.1M when compared to the first half of last year and with interest expense falling by £1.3M the net interest income grew by £7.4M. Conversely, fee and commission income declined by £1.5M with the expense broadly flat the net fee and commission income declined by £1.5M to give an operating income £5.9M higher overall. There was no income from the VISA Europe sale which brought in £1.7M last time but rental income from the new investment property brought in £1.1< and there was a £1.9M increase from the profit from the associate. It should be noted, however, that the increase is due the change in ownership of Secure Trust and last year’s income from the bank comes under discontinued operations, which fell by £11.2M.
Last time there were a few one-off investments and group bonuses relating to the EL sale, which accounted for £2.3M last time that was not repeated. Other Operating expenses grew by £6M, however, to give a pre-tax profit£4.9M higher. Tax charges fell by £449K but when we add on the profit from Secure Trust last year, the profit for the period came in at £2.4M, a decline of £8.3M year on year.
When compared to the same period of last year, total assets increased by £253.3M, driven by a £222.2M growth in loans to customers, a £55.4M increase in debt securities held to maturity and a £10M growth in intangible assets, partially offset by a £10M decline in cash and a £5M decrease in investments in associates. Total liabilities also increased during the period due to a £294.9M growth in deposits from customers and a £4.6M increase in deposits from banks. The end result was a net tangible asset level of £217.3M, a decline of £57.6M year on year.
The interest received declined by £67M with the interest paid down £13.1M. Fees and commissions received fell by £8M but rental income was up £1.1M, cash payments to employees and suppliers declined by £47.1M and tax payments decreased by £6.1M to give a cash flow before asset changes of £6.3M, a decrease of £7.6M year on year. Due mainly to a large increase in amounts due to customers, the net cash from operations came in at £120.9M, a positive movement of £192.2M year on year. The group spent £8.8M on computer software and £361K on property, plant and equipment. They also purchased a net £52.6M worth of debt securities and paid out £2.7M in dividends to give a cash flow for the half year of £56.5M and a cash level of £289.2M at the period-end.
The profit from Secure Trust, which is now accounted for as an associate, was £2.1M, a decline of £7.3M due to the sale of the shares in the business. There is a major uncertainty surrounding the associate income, however. At this stage it is estimated using the full year market consensus of the equity research performed on the business with an assumed straight line growth in profits over the first half of the year as Secure Trust is not scheduled to release its results until 22nd August. Given the majority of profits come from Secure Trust still, this is a major problem with the results in my view.
The profit from the Private bank was £4.8M, a growth of £327K year on year with the prior year figures including a gain of £1.7M relating to the sale of VISA shares. The forward looking indicators of the bank suggest that it is continuing to grow at a solid rate. Customer deposits, assets under management and loans have all increased by over 25% to £1.2BN, £1BN and £880M respectively. The private bank grew the number of new customers and wrote record volumes of new loans, with new originations reaching £76M in the period, an increase of 27%. The bank has experienced a significant level of loan repayments, however, which meant the loan book remained at a similar level to last year.
The commercial bank broke even during the period. Its customer balances have continued to grow at healthy rates and at the end of June its loan book had increased by £131M to £147M, and its deposit book by £137M to £160M. The business is now showing good signs of momentum and has a strong pipeline of business for the remaining months of the year.
In April the group completed the acquisition of Renaissance Asset Finance, a lender of specialist assets including vintage and high value cars and business assets. The business has shown that its distribution networks remain strong but prior to its acquisition, its certainty of funding was not clear and as a consequence, its balance sheet reduced in size as it was not able to meet all broker enquiries. At the time of the completion of the acquisition, the loan book had fallen to £57M. During its first two months as part of the group it has rebounded well and returned to growth and closed the period at £60M, an increase of 5% in its first two months.
Going forward, the short term geopolitical and macroeconomic environment seems more uncertain than it has for a number of years. The group remains focused on developing new areas of growth to diversify its income streams, however, and as a result of this, they remain confident that it is well place to take advantage of any opportunities that may arise.
At the current share price the shares are trading on a forward PE ratio of 31. After an increase in the interim dividend, the shares are yielding 2.3% which remains the same for the full year consensus forecast.
Overall then, this was a period defined by the fact that Secure Trust Bank is no longer a subsidiary. Like for like profits did increase but this was only due to income received for the investment property, otherwise they would have declined. Net assets fell and although the operating cash flow improved, cash profits were down. Albeit a decent amount of free cash was generated. The private bank seems to be growing nicely with the commercial bank gaining traction but the forward PE of 31 and yield of 2.3% seems a bit expensive to me but I must admit I find this hard to value.
On the 11th October the group announced a trading update covering Q3. Overall the lending pipeline remains strong, with aggregate volumes of written loans 75% higher than at the same time in the prior year. As the commercial bank is a new business, its repayment cycle is not yet at maturity so its loan book continues to grow in line with new business volumes. The private bank has experienced a steady flow of loan repayments, a trend which has continued into Q3 as older loans have been repaid, leading to a lower level of loan book growth. Overall the loan portfolio is 33% higher.
The Term Funding Scheme remains open for banks to access cheaper liquidity. This has manifested itself in the deposit markets where customer rates continue to fall. The overall cost of funds for the group has fallen by 30% from the prior year to a rate of 0.49%.
Following positive feedback from potential customers, the commercial bank is investing in infrastructure to launch a commercial property fund. They are also in dialogue with management teams which should further assist the business to diversify its asset base and earnings.
On the 22nd February the group released a trading update covering the year. They continued to trade well in Q4 and a result full year profits are in line with expectations. As previously announced they continue to explore opportunities to develop new businesses organically with the launch of these new businesses in 2018 being supported by certain upfront investment.