Arbuthnot Regulatory News (ARBB)

6 October 2011

Intention to Float Secure Trust Bank PLC on AIM

Arbuthnot Banking Group PLC ("Arbuthnot") is today pleased to announce its intention to float Secure Trust Bank PLC ("STB" or the "Company") on AIM, with admission to trading on AIM ("Admission") expected to occur by the end of October 2011. STB is currently a wholly owned subsidiary of Arbuthnot.

Secure Trust Bank PLC business highlights

·; A scalable, well established UK retail bank

·; The dislocation of major banks creates an opportunity for strong future growth as they deleverage and address legacy issues

·; Highly experienced management team and board

·; Potential demonstrated by 47 per cent growth in customer base, to over 120,000 customers, from 30 June 2010 to 30 June 2011

·; A range of deposit, current and household budget accounts

·; Lending into attractive segments of the market, including motor finance, retail point of sale finance and personal unsecured loans

·; Experiencing significant growth in new lending and demand for banking services (loan book up from £66.5 million as at June 2010, to £89.5 million as at December 2010, to £123.9 million as at June 2011)

·; Multiple distribution channels, through affinity partners, potential joint ventures and direct to customers

·; Funded by customer deposits and capital (no exposure to bank wholesale markets) with proven deposit raising capability

·; Customer loans and deposits broadly matched in maturity over a five year period with no lending exceeding five years

·; Technology-led lending processes which allow for significant business growth

Secure Trust Bank PLC financial highlights

·; Strong profits growth (38 per cent compound annual growth rate in profit before tax and group recharges from FY 2008 to FY 2010)

·; High return on average equity of 59 per cent before tax and group recharges for the 12 month period to 30 June 2011

·; Profit before tax and group recharges for the first half of the current financial year of £5.0 million

·; Net lending of £5.7 million per month on average for the first half of the current financial year

The Board of Arbuthnot ("the Board") believes that the Company has excellent growth prospects and that the proposed flotation will provide STB with further capital to support significant expansion of the loan book including, where appropriate, to make selective acquisitions of loan books and businesses and to grow within its chosen markets.

Summary of the proposed placing and Admission

The flotation will be effected by means of a placing of new and existing ordinary shares in STB (the "Placing") and Admission. Arbuthnot will retain a substantial majority shareholding in STB. Arbuthnot currently has no intention of selling further shares in STB following the flotation and will accept a restriction from doing so for six months from Admission. Arbuthnot recognises that, over time, STB may require further capital in order to take full advantage of suitable opportunities that may present themselves to the Company, and Arbuthnot would be willing to see its interest in STB further diluted at an appropriate time, in an appropriate way to enhance value for all shareholders.

Full details of the Placing will be included in the Admission Document expected to be published by STB in October 2011.

STB will appoint Hawkpoint Partners Limited as nominated adviser and financial adviser and Collins Stewart Europe Limited as broker in connection with the proposed flotation.

Henry Angest, Chairman and Chief Executive of Arbuthnot, said:

"Secure Trust Bank required no direct or indirect support during the financial crisis and has been expanding and creating jobs whilst many others contract. The challenges, distractions and legacy issues faced by the large UK banks and the consumer credit sector provide Secure Trust Bank with a significant opportunity, as a well-capitalised deposit funded bank, to grow within its chosen markets."

Paul Lynam, Chief Executive Officer of STB, said:

"The near doubling of net lending and 47 per cent growth in customer base over the 12 months to 30 June 2011 only serve to highlight the scale of the potential before us. We believe we can build substantially on our current position through a continued focus on carefully selected attractive segments of the market, prudent underwriting and a prudent approach to capital and liquidity. The IPO of Secure Trust Bank will fund further growth in the business, raise its profile and is the next logical step for the Company."

Financial information relating to the Company in this announcement is unaudited and may differ from financial information previously released by Arbuthnot for its "Retail Banking" business segment. Such differences primarily relate to intragroup items and Arbuthnot's insurance broking business which, prior to its disposal, was reported by Arbuthnot as part of the Retail Banking segment. This insurance broking business was not part of STB.

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Description of Secure Trust Bank PLC

STB is a regulated bank. The Company, which was incorporated in England in 1954, operates predominantly from its head office in Solihull and had 260 employees as at 30 June 2011.

The Company has a diversified lending portfolio including motor finance, retail point of sale finance and personal unsecured lending. Lending customers are primarily reached through carefully selected business partners and the internet. The Company has developed underwriting technology and processes to enable it to make lending decisions quickly, often on an automated basis, and has high customer satisfaction scores. The Board believes that this has been a key attraction in particular for its affinity partners (being business relationships entered into by the Company where both STB and the affinity partner co-operate in the promotion of their respective businesses). Examples of affinity partners include RentSmart for electronic goods, the Association of Cycle Traders (ACTSmart), the Arts Council and Pay4Later as a proposition to e-tailers.

By virtue of its focus on higher margin lending, the absence of large fixed overheads in the form of a branch network and a policy of not cross-subsidising loss making products with profitable ones, the Company is able to offer competitive deposit interest rates and has been successful in attracting term deposits from a wide range of personal and non-personal customers. STB's lending is funded by customer deposits, and, accordingly, STB has no exposure to wholesale funding. The customer loans and deposits are broadly matched in maturity over a five year period with no lending exceeding five years and a significant proportion of loans having a maturity of 12 months or less.

STB's strong financial record during the financial crisis of the last three years is evidenced by the growth of profits and payment of dividends during this period. In the three years ended 31 December 2010, the loan book has increased more than sevenfold from £12.6 million to £89.5 million, with net interest income increasing from £2.6 million to £12.5 million. As at 30 June 2011, the loan book was £123.9 million. Profit before tax and group recharges in the first six months of the current financial year was £5.0 million. Over the 12 month period to 30 June 2011, STB had a return on average equity of 59 per cent before tax and group recharges. As at 30 June 2011, the Company had a core tier one capital ratio of 16.4 per cent, an overall capital ratio of 19.7 per cent and a loan to deposit ratio of 57 per cent, reflecting a prudent approach to capital and liquidity.

As at 30 June 2011, STB's total customer base exceeded 120,000 clients, representing an increase of 47 per cent over the previous twelve months. The Company has continued to increase its overall customer numbers each month. It is achieving this without significant marketing activity which the Board believes is indicative of the demand from consumers for a viable and proven alternative to the high street bank offerings.

In late 2010, STB re-launched its fee based current account product. As at 30 June 2011, the fee based current account product had been taken up by approximately 14,000 customers with the account experiencing growth averaging 1,000 new accounts per month this year. In conjunction with this current account product the Company is developing new products to broaden its customer proposition.

The Board believes that the Company has a significant opportunity to increase lending across its existing diversified products including motor finance, retail point of sale finance and personal unsecured lending. The Board believes that this may be achieved through direct lending complemented by affinity partners and joint ventures. The Company will also consider acquisitions of loan books and businesses which, if acquired by the Company, will help grow its loan book and also provide access to new customers. To this end, as previously announced in Arbuthnot's interim results for the six months to 30 June 2011, STB is currently in discussions with a joint venture partner regarding the acquisition of a portfolio of personal unsecured loans and arrangements for the origination of further loans.

IMPORTANT NOTICE

This announcement does not constitute or form part of, and should not be construed as, an offer to sell or issue, or a solicitation of any offer to buy or subscribe for, any securities, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever nor should the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor.

Investors should not subscribe for or purchase any securities referred to in this announcement except on the basis of information in the Admission Document to be issued in due course by STB in connection with the Placing of and admission of the ordinary shares in the share capital of STB ("Ordinary Shares") to trading on AIM. In the event of any discrepancy between this announcement and the Admission Document in its final form, the Admission Document will prevail. The information contained in this announcement is for background purposes only. It is not the purpose of this announcement to provide, and reliance may not be placed on this announcement as providing, a complete and comprehensive analysis of Arbuthnot's or STB's financial or commercial position or prospects.

The date of Admission may be influenced by things such as market conditions. There is no guarantee that Admission will occur and financial decisions should not be based on Arbuthnot's intentions in relation to Admission at this stage. Investments to which this announcement relates may expose an investor to a significant risk of losing all of the amount invested. Persons considering investment in such investments should consult an authorised person specialising in advising on such investments. This announcement does not constitute a recommendation concerning any offer of securities. The value of securities can decrease as well as increase. Potential investors should consult a professional adviser as to the suitability of any investment for the person concerned.

No representation or warranty, express or implied, is or will be made by or on behalf of Hawkpoint Partners Limited ("Hawkpoint"), and no responsibility or liability is or will be accepted by Hawkpoint or its affiliates, as to the accuracy, completeness or verification of the information set out in this announcement, and nothing contained in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Hawkpoint and each of its affiliates accordingly disclaims, to the fullest extent permitted by law, all and any liability whether arising in tort, contract or otherwise which it might otherwise have in respect of this announcement or any such statement.

The distribution of this announcement outside the United Kingdom may be restricted by law and therefore any persons outside the United Kingdom into whose possession this announcement comes should inform themselves about and observe any such restrictions in connection with the Placing, the acquisition of securities and/or the distribution of this announcement. Any failure to comply with such restrictions may constitute a violation of the securities laws of any jurisdiction outside the United Kingdom. This announcement does not constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction in which such offer would be unlawful. In particular, this announcement does not constitute an offer to buy securities, and it is not for distribution, directly or indirectly, in or into the United States, Australia, Canada or Japan. The Ordinary Shares have not been and will not be registered under the US Securities Act of 1933, as amended, any state securities laws in the United States or any securities laws of Australia, Canada or Japan or in any country, territory or possession where to offer them may contravene local securities laws or regulations. Accordingly, the Ordinary Shares may not, subject to certain limited exceptions, be offered or sold, directly or indirectly, in or into the United States, Australia, Canada or Japan.

This announcement includes "forward-looking statements" which include all statements other than statements of historical facts, including, without limitation, those regarding Arbuthnot's or STB's financial position, business strategy, plans and objectives of management for future operations, or any statements preceded by, followed by or that include the words "targets", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "would, "could" or similar expressions or negatives thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Arbuthnot's and STB's control that could cause the actual results, performance or achievements of Arbuthnot or STB to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Arbuthnot's and STB's present and future business strategies and the environment in which Arbuthnot and STB will operate in the future. These forward-looking statements speak only as at the date of this document. Arbuthnot expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Arbuthnot's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based unless required to do so by applicable law or the AIM Rules for Companies.

Hawkpoint Partners Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as nominated adviser to Arbuthnot Banking Group PLC and Secure Trust Bank PLC and is acting for no-one else in connection with the Placing and Admission and will not be responsible to anyone other than Arbuthnot Banking Group PLC and Secure Trust Bank PLC for providing the protections afforded to clients of Hawkpoint Partners Limited nor for providing advice in connection with the Placing and Admission or any other matter referred to herein.

The contents of this announcement, which have been prepared by and are the sole responsibility of Arbuthnot, have been approved by Hawkpoint solely for the purposes of section 21(2)(b) of the Financial Services and Markets Act 2000.

Neither the content of Arbuthnot's website nor any website accessible by hyperlinks on Arbuthnot's website is incorporated in, or forms part of, this announcement.