Arbuthnot: Lender has ‘key advantage’ ahead of Bank of England rate cuts
Arbuthnot Banking Group is well-positioned for further interest rate cuts from the Bank of England, according to analysts despite its profit dropping by more than £10m during its latest financial year.
The lender booked a £35.1m pre-tax profit in its full-year results – a drop of over £10m from 2023.
Arbuthnot’s net interest margin – a metric used to show a bank’s profitability from lending – reduced by 60 basis points to 5.1 per cent.
UK lenders have been stung by lowering interest rates after the Bank of England slashed rates twice over the reporting period.
However, Vivek Raja, equity analyst at Shore Capital, said: “As lower interest rates work through, we assume [Arbuthnot’s] profitability continues to normalise in 2025.”
Raja said the bank’s “key differentiator” was funding – which it obtains “significantly more cheaply than most smaller UK bank peers”.
“Funding costs… should fall as interest rates reduce, though there will be another lag reflecting the duration of time deposits, which averages around six months,” he added.
This places the historic lender in a unique spot as UK banks adjust to changing rates.
Arbuthnot has ‘attractive investment case around income’
The firm planned to diversify its lending portfolios in its ‘Future 2’ strategy, which Raja said puts them on track to meet their target of 12.5 per cent returns on tangible equity.
The analyst projected base rate reductions of 25 basis points would translate to around £2.5m of revenue through the bank’s net interest margin.
He added: “After the sharp profitability improvement in 2023, 2024 faced the challenges of: reductions in interest rates to which Arbuthnot is significantly geared, macro uncertainty which was met with continued caution in underwriting standards, and increased operating costs given Arbuthnot’s office upgrade.”
Given these headwinds, Raja said Arbuthnot displayed a “robust performance”.
“We see Arbuthnot’s valuation as undemanding with significant upside to our unchanged 1600p fair value estimate and an attractive investment case around income,” he added.
Speaking to CityAM following Arbuthnot’s annual results, chief executive Andrew Salmon said: “[2023] year was flattered by rising interest rates” and praised the lender’s 2024 performance.