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Arbuthnot Banking Group (LSE:ARBB) could be appealing to investors seeking a combination of value and income. It addition to its sizeable yield, it’s trading at earnings multiples that are slightly below its blue-chip peers. What’s more, it might not be getting the attention it deserves. It hasn’t been covered on Fool UK for six years… maybe it’s simply overlooked.
Valuation metrics
The group’s valuation metrics suggest it is trading at a discount relative to its earnings and book value, which may appeal to value-oriented investors. Specifically, the forecasted price-to-earnings (P/E) ratio is 7.3 times for 2025, improving to 6.2 times in 2026.
These relatively low multiples indicate that the market may be underestimating the bank’s earning potential in the near term. The bank’s price-to-book ratio was just 0.53 in 2024. Once again, this suggests it’s simply undervalued. This tells us that shares are trading well below the group’s net asset value.
Coupled with this, Arbuthnot is expected to pay dividends of 53p per share in 2025 and 57p in 2026. This translates to attractive dividend yields of approximately 5.6% and 6%, respectively, based on the current share price of £9.48.
Earnings per share (EPS) projections show a slight dip in 2025 to 129.6p, followed by a rebound to 152.2p in 2026, reflecting a return to profit growth after a modest slowdown. Net income is forecast to increase from £21.3m to £25.1m over this period.
This valuation discount offers a margin of safety, which could protect investors against downside risk while providing potential for re-rating if the company’s profitability improves.
Operational developments
Arbuthnot has been actively investing in its infrastructure and technology, positioning itself for future growth. Recent expansions include moving to larger London premises and bolstering its specialist lending and wealth management divisions.
Management has also taken steps to mitigate interest rate risk by shifting towards fixed-rate lending and investing in high-quality securities. This strategy is designed to protect the bank’s margins in a potentially falling interest rate environment, as liabilities tend to reprice faster than assets.
Despite these positives, there are risks investors should consider. The bank’s earnings remain sensitive to interest rate fluctuations. Although management has taken measures to reduce this risk, unexpected changes in rates could still impact profitability.
Credit risk is another concern. While the loan portfolio is well-secured, a worsening economic environment could increase defaults, especially among clients flagged as watchlist risks.
The bottom line
The metrics look good and I’m fairly confident about the state of British banking at this time. The economy is growing slowly and interest rates have been falling at a steady pace, allowing for a gentle unwinding of strategic hedges.
I’m also interested by the consensus price target which sits 62% above the current share price. While I’m not going to buy straightaway, I’m going to add this one to my watchlist and continue to look at the data.
