I’ve always had a liking for Arbuthnot Banking Group (LSE: ARBB), although its recently impressive share price performance fell back in the second half of 2018.
The firm, which owns the Arbuthnot Latham & Co merchant bank in London, posted a healthy rise in underlying pre-tax profit for 2018, up from 2017’s £3.2m to £7.4m.
Underlying earnings per share (after adjusting for an accounting loss of £25.7m from the derecognition of Secure Trust Bank as an associated undertaking) came in at 40.3p per share, up from 17.6p a year previously.
Net assets per share did fall, from 1,547p to 1,283p, but at a share price of 1,355p, that looks fine to me.
All in all, chairman and chief executive Sir Henry Angest seems quite conservative, saying: “The group has had another good year.” Sir Henry also pointed to Arbuthnot’s new ventures, adding that they “should give the group a strong basis from which to develop in the future.”
Valuation
After a 4% share price rise on the morning of the results, and based on that underlying EPS figure of 40.3p, we’re looking at a trailing P/E of 34. To say the least, that’s high for a bank.
Very strong EPS growth forecasts for the next two years would drop that to around 17 by 2020, which you might think is still high. But, catering to high net worth individuals and businesses, Arbuthnot isn’t exposed to the same risks as its high street counterparts.
There are hardly going to be any mortgage default risks, and the bank should be pretty much immune to anything Brexit could throw at the economy. Add on Arbuthnot’s progressive dividends, and I see a long-term buy here.
Recovery?
I wish I could view Metro Bank (LSE: MTRO) with the same degree of comfort, but its financial acumen doesn’t appear to compare too favourably with Arbuthnot.
After launch, the challenger bank’s shares soared as investors saw enticing growth prospects. By mid-2018, we were looking at eye-watering prospective P/E multiples of more than 50.
But my colleague Rupert Hargreaves saw the writing on the wall as early as May that year. He pointed to feared weakness in the bank’s balance sheet and suggesting that Metro must “either raise more capital or put the brakes on growth.”
Collapse
That was prescient, and the subsequent share price collapse was made worse by the revelation of an accounting blunder that incorrectly classified the risk associated with millions of pounds of loans. The error was uncovered by banking regulators, and the Prudential Regulation Authority and Financial Conduct Authority are looking into it.
Plans to shore up the balance sheet with a £350m equity issue pushed the shares down even further. But that has raised the tempting prospect of a possible share price recovery, with analysts still offering upbeat earnings growth forecasts. That would put the P/E at 19 this year, dropping to 15 by the end of 2020.
If you’re brave enough to handle the risk, I think you might be on to a good thing if you buy now. But these recent shenanigans are not what I want when I think of a banking investment, so I’m keeping away myself.
