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Arbuthnot Banking Group (LSE:ARBB) has quietly become one of the most interesting banking stocks in the UK market. Despite short-term challenges from falling interest rates, the stock has pushed up in recent months on the back of operational resilience, underpinned by growth in customer deposits, specialist lending, and funds under management.
Earnings dip, but don’t worry
Profit before tax halved to £10.9m for the first half of 2025 — down from £20.8m last year — with earnings per share dropping to 42.5p from 94.6p. However, these weaker earnings were widely expected following a series of UK base rate cuts since mid-2024. Arbuthnot’s board appears confident in the group’s fundamentals. It has lifted the interim dividend by 10% to 22p. This marks its second consecutive year of dividend growth.
While short-term profitability is down, indicators of operational strength remain robust. Customer deposits grew 7% in the half and 14% year on year to £4.42bn. Meanwhile funds under management increased 22% over the same period to £2.38bn, supported by £127m of net inflows. The company also said that specialist lending rose 7% to £895.9m, even as overall customer loans declined 4%.
Valuation still modest
Arbuthnot trades at a modest valuation, with a 2025 forecast price-to-earnings (P/E) of 9.06 times and a price-to-book ratio (P/B) of just 0.59 times. This places the stock at a considerable discount to many of its UK-listed peers. The yield is also compelling, with a 5.3% expected payout for 2025 and further growth forecast through to 2027.
Analysts expect earnings growth throughout the forecasting period with the P/E ratio falling to 7.59 times for 2026 and 6.3 times for 2027. Combining this P/E, P/B, and dividend yield, I believe Arbuthnot is trading at a notable discount to its larger peers.
Net assets per share have also climbed to £16.49, comfortably above the current share price of £10.10. That wide discount to book value suggests the market may be undervaluing Arbuthnot’s long-term earnings power and asset quality.
Of course. some of this discount likely reflects its smaller market cap, lower liquidity, and relatively limited analyst coverage. Investors may also be applying a cautious lens to Arbuthnot’s more specialised lending profile which can introduce concentration risk or governance concerns. These are risks worth watching.
However, for those willing to look past these factors, the valuation appears to offer that all-important margin of safety. The bank’s capital position is solid. It has a CET1 ratio of 12.7% and a total capital ratio of 14.8%, both improved on the prior year.
The bottom line
Despite cyclical challenges and potential size concerns, Arbuthnot is delivering growth in core metrics and returning more cash to shareholders. With a conservative balance sheet, rising assets under management, and an attractive valuation, Arbuthnot could be one of the best-value opportunities in the UK banking sector today. It may not be the very best but I own stock in it, and feel investors should give it consideration.
