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Specialist lender Arbuthnot plots course to higher returns
For a private bank which made its name financing foreign trade in the 19th century and coming up for its 190th anniversary, Arbuthnot Banking (ARBB:AIM) has a very up-to-date approach.
Thanks to a major investment in technology in 2017, the entire workforce was able to work from home seamlessly when the pandemic struck last year, allowing the bank to remain fully operational and averting the need to lay off staff.
The company also has a handy knack of picking up undervalued businesses in the aftermath of financial crises. In 2012 it bought Everyday Loans for just £1 and in less than four years it sold the business on to Non-Standard Finance (NSF) for a profit of
Fearing contagion from the slowdown in the real economy and the potential for a liquidity squeeze, the bank focused on growing its deposits in 2020 with the result that customer balances increased 13% to £2.36 billion at a lower cost than the previous year.
At the same time the bank has been de-risking its balance sheet and reducing its exposure to the residential property market with the sale of a £55 million portfolio of home loans, which it bought in 2014 with a yield of 4%, to OSB Group (OSB) for a yield of less than 3%.
Thanks to its low-cost retail deposit base, Arbuthnot was able to continue searching for high-yielding businesses even during the pandemic, and at the end of 2020 it agreed the £1 million purchase of Asset Alliance, a leading truck leasing business which adds to its specialist commercial banking business.
NEW STRATEGIC PLAN
With its ability to find high yielding investments, the bank has set out a new strategic plan targeting a 15% pre-tax return on capital employed in three to four years, which makes its prospective 2022 price to earnings multiple of 12.7 times and price to net asset value of 0.8 times seem highly attractive.
For chief operating officer Andrew Salmon, the decision not to let people go and not to claim on the government’s furlough scheme meant ‘a pause in profitability’ as tumbling bank rates ate into the firm’s net interest margin, but it went down well with its private client customer base which still demanded a bespoke service.
Loan demand started briskly before reversing in March as the virus struck. Combined with a decision to tighten lending criteria, this meant ‘a year of missed growth’ as customer loan balances ended more or less flat at £1.59 billion.