Arbuthnot Banking : Results for the six months to 30 June 2021 and Interim Dividend Declaration

20 July 2021

ARBUTHNOT BANKING GROUP PLC ("Arbuthnot", "the Company", "the Group" or "ABG")

Unaudited results for the six months to 30 June 2021

and

Interim Dividend Declaration

Arbuthnot Banking Group PLC is pleased to announce a half yearly profit before tax of £3.0m compared to £0.2m in the prior year.

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited.

FINANCIAL HIGHLIGHTS

• Profit before tax of £3.0m (30 June 2020: £0.2m)
• Net bargain purchase from the acquisition of Asset Alliance Group Holdings Ltd ("Asset Alliance") of £8.7m*
• Special dividend paid in March of 21p per share
• Second interim dividend declared of 16p per share
• Capital surplus of £52.8m (31 December 2020: £84.2m)
• CET1 capital ratio of 12.5% (31 December 2020: 15.4%) and total capital ratio of 15.2% (31 December 2020: 18.7%)
• Liquidity surplus of £526m in excess of the minimum regulatory requirement
• Earnings per share 27.2p (30 June 2020: 0.9p)
• Net assets per share of £12.92 (30 June 2020: £12.48; 31 December 2020: £12.70)

OPERATIONAL HIGHLIGHTS

• Customer loans of £1,726m (30 June 2020: £1,565m; 31 December 2020: £1,536m)** increased by 12% in the first half of the year
• Completed the acquisition of Asset Alliance with integration progressing well, adding £132.3m of leased assets to the balance sheet
• Customer deposits of £2,643m (30 June 2020: £2,207m; 31 December 2020: £2,365m) increased by 12% in the first half of the year
• Assets under management £1,223m (30 June 2020: £1,074m; 31 December 2020: £1,147m) increased by 7% in the first half of the year
• Accredited in March 2021 to provide Government supported Recovery Loans "RLS"

*The net bargain purchase is recorded in the Income Statement and is the difference between the £10m purchase price paid for Asset Alliance and the adjusted fair value of the assets and liabilities of the business, which totalled £18.7m. This may be subject to further review and revision in the remaining months of the year.

**Comparative results adjusted for the sale of Tay residential mortgage portfolio that was sold in February 2021

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "During the first half of 2021 the Group has returned to growth across its businesses and restored profitability despite the ongoing low interest rate environment. The acquisition of Asset Alliance is a significant step in our strategy to diversify further through the development of specialist commercial finance businesses. The declaration of an interim dividend at the same level as in 2019 is an indication of our confidence for the future prospects of the Group."

Interim Dividend

The interim dividend of 16p per share will be paid on 24 September 2021 to shareholders on the register at the close of business on 27 August 2021.

The full set of interim results are available at http://www.arbuthnotgroup.com.

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

The information contained within this announcement is deemed to constitute inside information as stipulated under Market Abuse Regulations (EU) No. 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018. Upon the publication of this announcement, this is now considered to be in the public domain.

ENQUIRIES:
Arbuthnot Banking Group	020 7012 2400
Sir Henry Angest, Chairman and Chief Executive
Andrew Salmon, Group Chief Operating Officer
James Cobb, Group Finance Director
Grant Thornton UK LLP (Nominated Adviser and AQSE Corporate Adviser)	020 7383 5100
Colin Aaronson
Samantha Harrison
George Grainger
Numis Securities Ltd (Joint Broker)	020 7260 1000
Stephen Westgate
Shore Capital (Joint Broker)	020 7408 4090
Hugh Morgan
Daniel Bush
Maitland/AMO (Financial PR)	020 7379 5151
Neil Bennett
Sam Cartwright

Chairman's Statement

Arbuthnot Banking Group PLC

The Group has made a good start to the year with progress being made in all of the businesses. This, despite the fact that the majority of the Group's employees have remained working remotely throughout the first six months of the year.

Following our decision in March 2020 to effectively cease lending, our balance sheet saw no growth along with reduced levels of new loan originations. This situation has reversed in 2021 with new loan originations in the first six months totalling £392.3m. This resulted in the Group's customer loan balances increasing by 9% to £1.73bn and in addition to this we now have £132.3m of leased assets following the acquisition of Asset Alliance Group Holdings Limited ("AAGH" or "Asset Alliance") on 31 March 2021. In April Arbuthnot Latham & Co., Limited ("AL" or "Arbuthnot Latham") had total assets in excess of £3.1bn for the first time in its history.

The growth trajectory of the loans together with the leased assets should see the Group end the year with customer assets at the levels we had forecasted for 2021 prior to the pandemic.

The Group's ability to continue to attract quality customer deposits remains key to the future success of our strategy. The Bank made significant progress with this key objective and ended the first half of 2021 with surplus liquidity of £526m in excess of the minimum regulatory requirement of £378m. This is despite funding both the loan book growth and the acquisition of AAGH.

During the first six months, customer deposits grew by 12% from the year-end and 20% from 30 June 2020 to close at £2.64bn. The average cost of deposits now stand at 37 basis points ("bps"), compared to 78bps prior to the reduction in base rate following the start of the pandemic.

The acquisition of AAGH is a significant addition to the Group and complements our continued diversification and a move away from consumer finance to specialist commercial finance.

The final agreed purchase price was £10m and when this is compared to the adjusted fair value of the assets and liabilities of the business, which totalled £18.7m, it results in a bargain purchase of £8.7m which is recorded in the Income Statement. These numbers may be subject to further review and revision in the remaining months of the year.

The most significant fair value adjustment arose from the valuation of the leased truck fleet. The market for second hand trucks has seen large increases in value resulting from the shortage of supply of new trucks, which has been caused by the global scarcity of computer chips used in the manufacture of vehicles. Thus, the adjustment to the asset values was an increase of 15.95% on the carrying value. This totalled approximately £19m. The fact that the truck fleet has effectively been marked to market, resulted in future profit on sale of trucks being recognised upfront and will not therefore re-emerge in the results of AAGH until the back book of trucks has been sold over the next two to three years.

Also, the truck shortage has slowed the ability of AAGH to return to growth, given the new funding supply it now enjoys. AAGH has strong purchasing power and the availability of new trucks is starting to improve, but the relative shortage will delay the business growth plans by 6-12 months.

At the outset of the pandemic we were determined to support the economy in any way we could and accordingly we applied and were accredited to the Government loan schemes; Coronavirus Business Interruption Loan Scheme ("CBILs") and Bounce Back Loan Scheme ("BBLs"). We were pleased in April to also be accredited to the new Government scheme; the Recovery Loan Scheme ("RLS").

In 2020 the Group adjusted its IFRS9 economic scenarios to measure a 5.5% fall in residential property values. This remains unaltered in 2021 despite the increased property values recorded in the first six months of the year. We prefer to remain cautious as we await the impact of the withdrawal of the Government support packages, including the reduction of stamp duty on house purchases.

The Renaissance Asset Finance ("RAF") business continues to monitor its exposure to the London Taxi market, which is showing signs of recovery but remains some way from full capacity. The value of loans under active forbearance measures, excluding rewritten loans, now stands at £7.1m, which is down from £15.2m at the year ended 31 December 2020.

On 19 March 2021 the Group paid a special dividend of 21p per share to replace the dividend that was withdrawn at the request of the regulators at the outset of the pandemic. However, no dividend was paid in respect of earnings for 2020. This seemed an equitable share of the risks and rewards as the employees of the Group received no bonuses or pay rises in the same year.

In trying to restore this equilibrium now that the future prospects of the business are positive, the Group is declaring an interim dividend at the same level as paid in 2019 of 16p per share, to be paid on 24 September 2021 to shareholders on the register at the close of business on 27 August 2021. At the same time, the business has recorded a provision for bonuses at the same level as paid in 2019. It is the Bank's intention to return to fully operational offices in early September, following the relaxation in government guidelines, with measures planned over the summer to ensure a smooth and safe transition for both clients and staff.

Arbuthnot Latham & Co., Limited

Arbuthnot Latham has reported a profit before tax for the first half of the year of £3.0m (30 June 2020: £5.0m).

The Bank has now returned to growth and is restoring its profitability. However, the earnings continue to be held back by the continued low interest rate environment introduced as part of the emergency support package to protect the economy during the pandemic. This low rate has cost the Bank £8.4m in the first six months, assuming a base rate of 75bps.

Total assets of the Bank have increased to £3.16bn (30 June 2020: £2.70bn), an increase of 17%. Customer loans ended the first

half at £1.73bn (30 June 2020: £1.62bn), an increase of 7% and 9% higher than the balance reported at the 2020 year-end. During

the half year, the Bank originated new loans of £392.3m (30 June 2020: £193m).

The Bank grew its asset base from the year-end despite the sale of the Tay retail mortgage portfolio, which comprised balances totalling £54.9m. The portfolio was sold for a consideration of £53.8m representing 97.9% of customer balances. The portfolio was acquired at a discount in 2014. Upon sale of the portfolio the unamortised discount was realised, resulting in a net profit after professional fees of £2.1m.

Also included in the result is an accrual for staff bonuses of £6.5m. In order to conserve capital during the height of the global pandemic no discretionary bonuses were awarded for the year ending 31 December 2020. However, due to the expected return to profitability for 2021, the Bank intends to reward its staff for their hard work and dedication over the period. Bonuses will be paid after the year-end and in line with the Bank's standard remuneration and award cycle.

The Bank continued to grow its deposit base, ensuring adequate liquidity is maintained following the funding of the Asset Alliance acquisition. As at 30 June 2021, customer deposits were £2.64bn (30 June 2020: £2.21bn), an increase of 20% on the prior year and an increase of 12% from the levels at the 2020 year-end.

Despite the volatility in the markets, Assets under Management ("AuM") increased to £1.22bn (30 June 2020: £1.07bn).

Banking

The Banking division has reported a profit before tax of £0.1m (30 June 2020: profit of £4.8m), with lending balances totalling £1.28bn and deposits of £2.43bn. The reduction in profitability is largely due to bonus accruals which were not included in the prior period.

The business continued to grow in the first half of 2021, transforming prospects and pipeline into client balances whilst supporting its existing clients' aspirations as the economy tentatively emerges from the pandemic.

In the opening months of 2021, new client acquisitions were again greater than the prior year. Growth was generated by both Private and Commercial Banking, whilst at the same time the business continued to support existing clients by providing further banking and wealth planning solutions evidenced through growth across the organisation.

Deposits increased by 12% in the first six months of 2021, diversified broadly across all segments. The division continues to focus on deposit growth for the remainder of 2021, in pursuit of the Bank's client acquisition strategy. A deepening of existing relationships leveraging off the Bank's high touch relationship management approach has generated significant goodwill with clients and is considered more valued than ever.

Deposit pricing fell further compared to the 2020 rates, as pre-pandemic pricing rolled off the book to be replaced at lower rates, however, it is expected that pricing will start to stabilise for the remainder of 2021 as the majority of the higher priced back book matures.

The lending pipeline at the end of 2020 resulted in 13% loan book growth for the first half of 2021. The pipeline remains strong with growth expected to continue for the rest of 2021. The business has continued to maintain its strategy of conservative lending whilst ensuring focus remains on the risk reward profile of potential opportunities. Consequently, there has been a conscious shift towards more residential investment lending versus commercial real estate.

Lending growth has been generated from both Private and Commercial Banking relationships, with high levels of activity from the International and Real Estate teams.

The Dubai branch was closed on 31 May 2021. All existing relationships were successfully migrated to the Bank's London based teams for ongoing client servicing.

Wealth Management

AuM were £1.22bn as at 30 June 2021 (30 June 2020: £1.07bn). Wealth Management generated positive gross inflows over the first six months of 2021, with a 67% increase on the prior year, equating to a 17% annualised gross inflow rate against opening AuM. The client pipeline continues to build positively, with several larger value mandates in development.

The Sustainable Portfolio Service was launched in the second quarter, which utilises the business's central risk framework. The service leverages the underlying research and macro views of the Investment Committee, whilst seeking to maximise exposure to themes that will deliver positive social and environmental outcomes.

Mortgage Portfolios

Mortgage Portfolio balances were £195.1m as at 30 June 2021 (30 June 2020: £300.8m); this balance related entirely to the Santiago portfolio acquired in August 2019, after the Tay portfolio was sold in February 2021.

The portfolio continues to perform to expectation, with forbearance balances following the COVID payment holidays reduced to 0.2% of the total portfolio.

Renaissance Asset Finance ("RAF")

RAF has reported a profit before tax of £1.0m (30 June 2020: £1.0m), with customer loan balances of £93.0m (30 June 2020: £101.4m).

The decline in loan balances seen in 2020, as the result of the combined effects of a drop in demand by SMEs for vehicles and capital equipment, together with a tightened approach to risk, is now showing signs that it has stabilised with an indication of increased demand for asset finance facilities.

Loans under forbearance measures have recovered significantly from the peak 12 months ago. The London taxi market, making up the majority of loan balances under forbearance, is taking longer to recover and remains a key area of focus. The business is optimistic that, as restrictions ease, taxi operators will experience an improvement in activity as social distancing guidelines relax and business and leisure activity increase over the coming months.

The business recorded IFRS9 credit provisions of £0.1m (30 June 2020: £0.3m) for the six months to 30 June 2021.

Arbuthnot Commercial Asset Based Lending ("ACABL")

ACABL has reported a profit before tax of £1.8m (30 June 2020: £0.7m), with funds in use of £147.9m (30 June 2020: £66.5m).

The asset based lending business experienced a strong first half, benefitting from a significant pipeline generated at the end of 2020. The business issued 21 new facilities and had one repayment in the six months to 30 June 2021.

Revenue from servicing fees has grown in line with client activity as businesses increased their revenues following the lows of the previous 12 months. Additionally, as expected, with increased client activity, existing facilities have shown signs of amounts drawn against facility limits increasing to pre-pandemic levels.

Arbuthnot Specialist Finance Limited ("ASFL")

ASFL has made a loss before tax of £0.6m (30 June 2020: loss of £0.5m). Customer loan balances were £7.5m at the half year (30

June 2020: £8.7m).

The business continues to explore opportunities leveraging the lack of liquidity within the non-bank lending sector as the bridging finance market emerges from the lockdown period.

Asset Alliance Group Holdings Limited ("AAGH")

Following the acquisition of AAGH that completed on 31 March 2021, the business reported a profit of £7.9m, including the profit recognised from the bargain purchase. The underlying performance of the business in the three months to 30 June 2021 was £0.8m and additionally included in the results of AL was £0.7m related to the intercompany funding provided to AAGH.

As a result of the acquisition accounting requirements, which in the first case generated a gain of £8.7m via net bargain purchase, there is the requirement to adjust the cost of sales of trucks for the new base cost that will apply to the back book of trucks. This reversed £1.5m of profits. Also included was the amortisation of the brand intangible which totalled £90k in the three month period.

Beside the fair value exercise, which will be completed in the second half of the year, the integration of AAGH into the Group is progressing well.