Arbuthnot Regulatory News (ARBB)

16 October 2019

Arbuthnot Banking Group PLC

Third Quarter Trading Update

Arbuthnot Banking Group PLC ("Arbuthnot", "ABG" or "the Group") today issues an update on trading for the three months to 30 September 2019.

Highlights

·; Continued good progress in developing and diversifying the business, and also operationally as new investment is transforming the efficiency and resiliency of the Group's operating platforms.

·; Completion and smooth transition of two residential mortgage portfolios at a 2.7% discount to par, adding £264.9m of mortgages to the Group loan book.

·; Overall loan balances have grown 33% compared to the prior year and have since exceeded £1.6bn.

·; Deposit balances have increased 17% compared to the prior year and have since surpassed £2bn.

·; £85m of new deposits raised by Arbuthnot Direct since the mortgage portfolio acquisitions leaving the Group with more than £300m surplus liquidity in excess of the minimum regulatory requirement.

·; New divisions continue to make strong progress:

o Renaissance Asset Finance ended the quarter with lending balances of £101m, an increase of 22% compared to the prior year.

o Arbuthnot Asset Based Lending has grown customer facilities to £106m, an increase of 278% over the prior year.

·; Work has commenced on a major refurbishment and enhancement of the Group's West End property.

Commenting on the third quarter trading, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot said:

"The Group remains well positioned to continue its strategy of diversification of its lending and deposit raising capabilities and the deployment of the surplus capital. Our ability to maintain high levels of surplus liquidity has enabled us to take advantage of opportunities that present themselves over time, such as the acquisition of the mortgage portfolios. As a result of this and notwithstanding the current geo-political uncertainties, we remain confident of being able to continue to grow the businesses within the Group."

Mortgage Portfolio Acquisition

In August the Group completed the purchase of the residential mortgage portfolios which added £264.9m of mortgages acquired at a discount of 2.7%. The transition of the portfolios took place smoothly and the portfolios continue to perform better than indicated by the models used as part of the transaction.

Arbuthnot Direct

As previously described, the Arbuthnot Direct deposit platform was created, in part, to enable the bank to participate in transactions such as the portfolio acquisition, giving the Group the ability to build its liquidity resources quickly. Accordingly, following the signing of the purchase agreement, Arbuthnot Direct has raised £85m of new deposits and at the quarter end the Group's surplus liquidity was in excess of £300m of the amount required to be held in reserve. At the end of September our deposit balances are 17% higher than the prior year and since the quarter end the balances surpassed £2bn for the first time.

Core Loan Book

The core lending business continues to work on a number of new business opportunities but has seen increasing uncertainty in the macro economic outlook lead to a delay in the drawdown of these loans. As a result, the underlying loan balances (excluding the mortgage portfolio purchase) are behind where we anticipated, but we believe this simply to be a timing issue, rather than a fundamental change. Regardless of this, the Group continues to maintain strong discipline in pricing lending risk, as it expects the current heightened competition in the retail lending markets to pass. Despite the wider economic uncertainty, lending balances are 33% higher than the same time in 2018 and since the quarter end have surpassed £1.6bn.

Associated with the loan book the Group has a number of interest rate derivatives that are hedging approximately £26m of fixed rate loans. During the year these derivatives have generated a mark to market loss of approximately £500k as a result of falling interest rates in the LIBOR markets. If market conditions continue at these levels, this mark to market loss will flow into the year end results. However, over the full term of the derivative contracts the overall economic effect will result in a net zero impact to the profit and loss of the Group.

Though the performance of the underlying loan book remains strong, we continue to work through a small number of longstanding impaired loans. However, the resultant IFRS 9 provisions that arise when the outlook for economic scenarios used in the stress testing worsen, have seen a small increase. In addition there are now provisions associated with the grossing up of interest, which were not previously required.

Private Bank

The change in strategy to focus the Private Bank on identifying and attracting new criteria clients is beginning to show results, with the number of new clients that have joined in the first nine months of 2019 averaging approximately 40 per month. As a result, the net inflows of customer balances into the Investment Management business have been positive for each of the three months in the third quarter. However, assets under management remain below our expectations, largely as a result of the poor stock market conditions at the end of 2018 and also the slow conversion rate of criteria clients in the first part of the year.

The Wealth Planning division will be loss making this year as a result of a fundamental change in its business proposition and hence its charging structure. In July the business ceased charging clients for ongoing annual advice reviews and moved to an event based model, where clients are charged wealth planning fees when they need specific advice.

New Business Divisions

The Group's new business divisions continue to make good progress.

Renaissance Asset Finance ended the quarter with lending balances of £101m, an increase of 22% compared to the same time in the prior year. This growth represents good progress, with the business recording above average volumes in July and August. The market has also seen a number of competitors withdraw from the market, which we expect to aid us in the long term. However, the business has experienced a small number of credit impairment events which will temper the otherwise overall good performance of the business.

The Arbuthnot Asset Based Lending business has continued to source new lending opportunities and has increased its customer facilities to £106m, an increase of 278% on the prior year.

The business also experienced its first potential credit event as one of its customers suffered a downturn in its trading performance. However, Arbuthnot's team managed to facilitate a rescue of the business via a trade sale.

Arbuthnot Specialist Finance has only lent £1m as it remains in a soft launch phase due to an aborted initial search for a technology provider for its customer facing loans platform. A new provider is now engaged and the platform should be fully operational in 2020.

Operational Resilience and Efficiency

During the quarter, the Group agreed to implement the Salesforce CRM System, which will transform the way in which the bank interacts with clients. The implementation of this system is now fully in train with the Group's technical partners and the first phase is expected to be completed by Q1 2020.

At the same time, the Group has agreed to develop a new website for Arbuthnot Latham, which will enable the business to establish a digital marketing channel for the first time.

In conjunction with our partners at Oracle, the Group has been developing the API (Application Programming Interface) connections to the wider payment systems to be fully compliant with the Second Payment Services Directive ("PSD2"). As a secondary benefit to this, the Group will examine its payment clearing mechanisms, which we expect will enable Arbuthnot Latham to offer extended clearing services beyond its current payment cut off times. We expect this to enable the bank to offer enhanced banking products to its clients, which we expect will be implemented during 2020.

Investment Properties

The major tenant of the Group's West End property moved out at the end of its lease at the end of September. Work has now commenced to complete a major refurbishment and enhancement of the building. Once completed, the office space is expected to be re-let at a significantly higher rent and when market conditions permit, the Group will look to sell the property.

The refurbishment of the property in Birmingham has largely been completed and a tenant for one of the five floors have already been found. Also, this property will now be reclassified as being "held for sale" rather than as an investment property.

The Directors of the Company accept responsibility for the contents of this announcement.

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