Rising interest rates underpin Arbuthnot's third quarter

The AIM-traded firm said its September underlying monthly profit before tax was approaching £4m, excluding the one-off cost-of-living bonus payment made to all employees.

Any future base rate increases would continue to have a corresponding positive impact on its revenue, as around £2.6bn of its loan and liquidity assets had variable interest rates linked to the base rate.

As a result, the board said it expected that both reported and underlying profit for the year ending 31 December would be ahead of market expectations.

“However, as referenced in the interim statement, it should be noted that at this current time, the group is experiencing higher net interest margins than it expects over the longer term; the repricing of deposits generally has a delay of up to 12 months as time deposits reach maturity,” the board said in its statement.

“Also, the group is yet to see the full impact of the inflationary pressures that are currently working their way through the economy.”

During the quarter ended 30 September, deposit balances of the company’s bank subsidiary Arbuthnot Latham & Co topped £3bn for the first time in its history, as its deposit-gathering model continued to prove successful.

As expected, the cost of deposits was beginning to rise and was now in excess of 81 basis points, but the directors said that compared “favourably” with the current base rate of 2.25%, and also “proved the value” of developing a relationship-based deposit platform rather than relying on “best buy” deposits, which were currently seeing one-year rates reaching more than 4%.

“Our liquidity remains robust with the bank having surplus liquid assets of more than £411m above the minimum regulatory requirement of £565m.

“The group remains well capitalised, and this is expected to strengthen given the improved profitability.”

Arbuthnot said its group loan balances had increased to £2.2bn, but given the current market uncertainty, it had tightened its credit appetite, particularly in real estate lending.

“We are now stressing the affordability of interest payments to levels in excess of the 2% increase in rates that is prescribed.

“The effect of this will be to reduce the loan-to-value on our new lending below our guidance of 60%.

“It is also expected that this change in appetite will reduce our lending volumes in the short term.”

However, given its increased levels of profitability, Arbuthnot said it was “content” to save its financial resources for future opportunities.

“In the current economic environment, it is likely that the risk of defaults will increase across the economy; however, the group continues to maintain its long held credit principles and discipline.

“Currently, the non-performing loan book has been reduced to its lowest level for over two years and there are no signs of material stress in the credit metrics.

“The average loan-to-value against the loan book remains low at 51%, giving significant levels of security to withstand and minimise the effect of any potential falls in property markets.”

At 1008 BST, shares in Arbuthnot Banking Group were up 8.05% at 805p.

Reporting by Josh White at Sharecast.com.