The key message from the 3Q’19 trading statement was of continued strong franchise growth (loans +33% to £1.6bn, deposits +17% to £2bn). The Private Bank has been adding ca.40 clients per month, although it takes time to generate revenue growth from them. Arbuthnot Direct has raised £85m of depositssince August, and other new business areas have shown strong grown (Renaissance Asset Finance loans £101m, +22%, Asset Based Lending £106m). There have been a limited number of credit situations with impairments rising, as may be expected at this stage of the cycle. Investment has been accelerated relative to our prior estimates and the wealth management division is being restructured.
The key messages continue – strong franchise growth, diversification by product and customer base, and a capital/liquidity structure that allows profitable, opportunistic acquisitions. Arbuthnot Direct has proven deposit flexibility. Its impairments remain modest, and are in line with our forecasts.
ABG is not immune from market uncertainty delaying deal conversion. Relative to the franchise growth, it is modest. As the expected franchise growth has been delivered, ABG is now investing a little ahead of our previous expectations. It has also restructured the wealth management business.
The average of our approaches is now £16.42(previously £17.92), 1.3x 2020E NAV. Two of our models are based off 2020 earnings estimates, which now include accelerated investment but not the payback for it. The share price is well below the 1H’19 NAV (1,321p).
As with any bank, the key risk is credit. ABG’s existing business should see below-market volatility, and so the main risk lies in new lending. We believe management is cognizant of the risk, and has historically been very conservative. Other risks include reputation, regulation and compliance.
ABG offers strong-franchise and continuing-business (normalised) profit growth. Its balance sheet strength gives it wide-ranging options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been innovative, but also very conservative, in managing risk. Having a profitable, well-funded, well-capitalised and strongly- growing bank priced below book value is an anomaly.
