Secure Trust Bank — Positive trading update

Secure Trust Bank (LSE: STB)

Last close As at 27/03/2024

GBP6.70

18.00 (2.76%)

Market capitalisation

GBP125m

More on this equity

Research: Financials

Secure Trust Bank — Positive trading update

STB’s Q318 trading update was upbeat. There are signs that the repositioning strategy is working, trading conditions are robust and it is on track to deliver guided earnings. The Tier 2 capital issue during the period added 268bp to capital, further positioning STB for future growth. Our estimates are unchanged (EPS growth 32% FY18). The shares now trade at PNAV of 1.2x, which compares favourably with our forecast ROTE.

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Financials

Secure Trust Bank

Positive trading update

Q3 trading update

Banks

18 October 2018

Price

1,465.0p

Market cap

£271m

Net debt/cash (£m)

N/M

Shares in issue

18.5m

Free float

81%

Code

STB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.6)

(18.7)

(20.3)

Rel (local)

(12.1)

(12.0)

(15.2)

52-week high/low

2085.0p

1397.5p

Business description

Secure Trust Bank is a well-established specialist bank addressing niche markets within consumer and commercial banking. It has launched a non-standard mortgage business. Former parent Arbuthnot Banking Group’s shareholding is now less than 20%.

Next event

Pre-close trading update

January 2019

Analysts

Pedro Fonseca

+44 (0)20 3077 5700

Andrew Mitchell

+44 (0)20 3681 2500

Secure Trust Bank is a research client of Edison Investment Research Limited

STB’s Q318 trading update was upbeat. There are signs that the repositioning strategy is working, trading conditions are robust and it is on track to deliver guided earnings. The Tier 2 capital issue during the period added 268bp to capital, further positioning STB for future growth. Our estimates are unchanged (EPS growth 32% FY18). The shares now trade at PNAV of 1.2x, which compares favourably with our forecast ROTE.

Year end

Operating income (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

129.5

27.0

116.4

79.0

12.6

5.4

12/18e

152.9

34.9

154.8

83.0

9.5

5.7

12/19e

174.0

44.4

191.7

90.0

7.6

6.1

12/20e

196.4

52.7

224.6

100.0

6.5

6.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. 2017 figures are on a continuing basis.

Upbeat trading in uncertain markets

STB indicates that Q3 trading was strong and it is comfortable with full-year guidance, despite economic and Brexit concerns. We expect earnings and loans to grow by 32% and 28% in 2018, respectively. Repositioning has left STB with a lower risk book, focused on areas where the risk-reward pricing is currently better. STB notes that investments it made in collections in 2017 are having a positive impact on results this year.

Ready for better times

The company is ready to increase its risk appetite when macro-political concerns decline and pricing is appropriate. STB has both operational and balance sheet headroom; the latter recently boosted by a Tier 2 level capital issue. Key drivers of our estimated loan growth are commercial finance and commercial real estate, but the emphasis may shift as the bank has shown a willingness to adapt to changing circumstances.

Capital ratios bolstered

In Q318, STB raised £50m in fixed rate callable 10-year subordinated debt at 6.75%. While this has no impact on our CET1 year-end forecast of 13.2%, it adds 268bp of Tier 2 capital at a reasonable price. This takes our total capital ratio forecast to 15.9% by December 2018. This, combined with STB’s internal capital generation, gives management flexibility to react positively should market conditions improve.

Valuation: PNAV now only 1.2x

STB shares are down 21.5% ytd and trading at an eye-catching 1.2x PNAV. This seems an undemanding valuation, given our ROTE forecasts of 12.7% this year, followed by 15.9% and 18.0% in 2019 and 2020, respectively. We believe that the market is still not giving STB credit for success in moving to a lower risk profile and focusing on profit margins across the various products. We feel that STB retains strong growth potential, while also showing a pragmatic and nimble approach to lending strategy. The update suggests it is on track to meet our expectations.

Repositioning paying off

STB’s decision to reduce risk in its portfolio, including a move away from unsecured personal lending, seems to be paying off. The latest update indicates that Q318 trading has been robust and that it is on track to deliver on the guided earnings, despite the macro and political concerns.

Moving the loan mix towards lower interest rate products does not work if impairment charges do not drop correspondingly. The update reassuringly states that lower NPL charges continue to be a key earnings growth driver.

Repositioning a loan portfolio always carries with it some execution risk. STB has achieved this and is reaping the rewards (Q218 already had evidence of this, see our note 15 August 2018).

Forecasts remain unchanged

The dynamics for the strong EPS growth expected over our forecast period remain the same. We forecast loan growth of 28% y-o-y for 2018 and 2019, but with a tighter interest margin; the interest income grows less at 14% y-o-y. This is then offset by control over cost growth (+21% y-o-y) and a lower rate of impairment, resulting in pre-tax profit and underlying EPS growth of 32% and 33%, for FY18. We expect the shape of the growth drivers to be somewhat similar in 2019 and are forecasting 24% EPS growth. These are attractive growth numbers, given the existing market challenges.

Exhibit 1: STB loan book forecasts

Loans (£m)

2016

2017

2018e

2019e

2020e

Real estate finance

451.0

580.8

850.0

1,150.0

1,285.0

Asset finance

117.2

116.7

25.0

0.0

0.0

Commercial finance

62.8

126.5

220.0

330.0

390.0

Personal exl ELG

65.5

0.0

0.0

0.0

0.0

Motor finance

236.2

274.6

280.0

300.0

350.0

Retail finance

325.9

452.3

580.0

680.0

770.0

Mortgages

0.0

16.5

50.0

100.0

150.0

Other

62.4

30.9

45.0

60.0

70.0

Total group

1,321.0

1,598.3

2,050.0

2,620.0

3,015.0

Loan growth % (y-o-y)

37.5

21.0

28.3

27.8

15.1

Source: STB data and Edison Investment Research forecasts

Tier 2 issue reinforces capital

STB recently issued £50m in a 10-year fixed rate subordinated debt. The notes are callable at five years and will be considered Tier 2 capital. STB previously had no Tier 2 instruments and the notes add an estimated 268bp to capital at the end of the year, raising the bank’s total capital ratio to close to 16%. Our estimate for the CET1 ratio remains at 13.2% for the end of 2018. We believe that this provides good headroom for growth. Given the bank’s robust profitability, this capital allows the bank to be able to significantly expand in the next three years, despite paying out close to half of its earnings as dividends. We forecast the CET1 will drop to 10.7% by the end of 2020, but this is still a healthy level of capital.

Valuation

STB’s share price has fallen 18.3% in the past three months and 21.5% year-to-date – one of the weakest performances within our selected peer group (Exhibit 2).

Exhibit 2: Challenger/specialist lender share price performance

3 months

1 year

ytd

From 12m high

Secure Trust Bank

(18.3)

(22.3)

(21.5)

(21.0)

1PM

(19.1)

5.7

(7.0)

2.2

Close Brothers

(7.2)

(0.9)

2.7

4.0

CYBG

(17.0)

(16.2)

(10.4)

(18.6)

Metrobank

(6.0)

(20.5)

(26.0)

(26.5)

OneSavings Bank

(6.5)

(13.9)

(4.1)

(7.5)

Paragon

(4.2)

(15.1)

(6.1)

(11.1)

Private and Commercial Finance

(15.3)

(1.4)

27.9

24.6

S&U

(6.5)

(9.4)

10.0

0.7

Average

(11.1)

(10.5)

(3.8)

(5.9)

Source: Bloomberg

The shares are now trading at 2018 P/NAV of only 1.2x. This does not seem to be a demanding valuation in the context of our forecast ROTE of 12.7% for this year, rising to 18% for 2020. This is actually the same ROTE as the average for its peers in 2018 (see Exhibit 3). The average P/NAV of these peers is currently 1.7x; this suggests the scope for re-rating if STB is able to achieve our forecast profitability. We also note that STB offers the highest dividend yield among its peers, at 5.8% for FY18e.

We think that as the market gains confidence that STB’s repositioning is indeed working, this will be reflected in its rating. On this basis, the trading update is clearly a positive indicator.

Exhibit 3: Challenger/specialist lender comparative table

Price

Market
cap

2018
PER

2019
PER

2018
yield

2018
ROTE

Price to NAV (x)

Secure Trust Bank

1,424.0

262.3

9.3

7.5

5.8

12.7

1.2

1PM

46.5

40.1

6.2

6.1

1.1

38.5

2.0

Close Brothers

1,506.0

2,280.8

11.0

10.5

4.2

18.4

2.0

CYBG

276.4

3,944.1

12.0

10.0

0.0

4.9

0.8

Metrobank

2,636.0

2,567.8

50.2

25.7

0.0

1.3

2.5

OneSavings Bank

381.6

932.9

7.1

6.6

3.3

24.8

1.5

Paragon

436.2

1,137.6

9.4

8.6

3.6

13.2

1.3

Private & Comm. Finance

35.5

75.3

19.9

13.5

0.0

9.6

2.4

S&U

2,300.0

276.3

11.2

9.6

2.0

16.7

1.8

Ave ex STB

15.9

11.3

1.8

15.9

1.8

Ave ex STB, Metro

11.0

9.3

2.0

18.0

1.7

STB rel peers ex-Metro (%)

83.8

79.7

289.0

70.4

72.1

Source: Bloomberg, Edison Investment Research. Note: Priced at 16 October 2018.

Exhibit 4: Financial summary

Year-end December (£m, except where stated)

2016

2017

2018e

2019e

2020e

Profit and loss

Net interest income

92.5

114.6

134.0

150.3

170.8

Net commission income

14.5

14.9

18.9

23.8

25.6

Total operating income

107.0

129.5

152.9

174.0

196.4

Total G&A expenses (exc non-recurring items below)

(64.3)

(71.3)

(86.0)

(95.0)

(105.8)

Operating profit pre impairments & exceptionals

42.7

58.2

66.9

79.0

90.5

Impairment charges on loans

(23.3)

(33.5)

(34.0)

(35.9)

(37.9)

Other income

0.0

0.3

0.0

0.0

0.0

Operating profit post impairments

19.4

25.0

32.9

43.1

52.7

Non-recurring items

0.0

0.0

0.0

0.0

0.0

Pre-tax profit - continuing basis

19.4

25.0

32.9

43.1

52.7

Corporation Tax

(5.2)

(5.1)

(5.6)

(7.3)

(9.0)

Tax rate

26.8%

20.4%

16.9%

17.0%

17.0%

Bank tax surcharge

0.0

0.0

(0.4)

(1.5)

(2.2)

Profit after tax - continuing basis

14.2

19.9

26.9

34.3

41.5

Discontinued business

123.3

3.9

0.0

0.0

0.0

(Loss)/profit for year

137.5

23.8

26.9

34.3

41.5

Minority interests

0.0

0.0

0.0

0.0

0.0

Net income attributable to equity shareholders

137.5

23.8

26.9

34.3

41.5

Company reported pre-tax earnings adjustments

7.9

2.0

2.0

1.3

0.0

Reported underlying pre-tax earnings (ex discontinued 2015/16)

27.3

27.0

34.9

44.4

52.7

Reported underlying earnings after tax

20.6

21.5

28.6

35.4

41.5

Average basic number of shares in issue (m)

18.5

18.5

18.5

18.5

18.5

Average diluted number of shares in issue (m)

18.6

18.6

18.6

18.6

18.6

Reported diluted EPS (p)

77.3

107.0

144.9

184.7

223.2

Underlying diluted EPS (p)

113.0

116.4

154.8

191.7

224.6

Ordinary DPS (p)

75.0

79.0

83.0

90.0

100.0

Special DPS (p)

165.0

0.0

0.0

0.0

0.0

Net interest/average loans

8.15%

7.72%

7.34%

6.44%

6.06%

Impairments/average loans

2.04%

2.30%

1.87%

1.54%

1.34%

Cost income ratio

60.1%

55.1%

56.2%

54.6%

53.9%

Balance sheet

1.28

Net customer loans

1,321.0

1,598.3

2,050.0

2,620.0

3,015.0

Other assets

189.0

293.3

306.3

391.5

450.5

Total assets

1,510.0

1,891.6

2,356.3

3,011.5

3,465.5

Total customer deposits

1,151.8

1,483.2

1,971.2

2,543.7

2,927.2

Other liabilities

122.2

159.3

149.4

213.3

259.9

Total liabilities

1,274.0

1,642.5

2,120.6

2,757.0

3,187.0

Net assets

236.0

249.1

235.7

254.5

278.5

Minorities

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

236.0

249.1

235.7

254.5

278.5

Reconciliation of movement in equity

Opening shareholders' equity

141.2

236.0

249.1

235.7

254.5

Profit in period

137.5

23.8

26.9

34.3

41.5

Other comprehensive income

(1.8)

2.9

(25.8)

0.0

0.0

Ordinary dividends

(13.1)

(14.0)

(14.8)

(15.5)

(17.6)

Special dividend

(30.0)

0.0

0.0

0.0

0.0

Share based payments

0.2

0.4

0.3

0.0

0.0

Issue of shares

2.0

0.0

0.0

0.0

0.0

Share issuance costs

0.0

0.0

0.0

0.0

0.0

Closing shareholders' equity

236.0

249.1

235.7

254.5

278.5

Other selected data and ratios

Period end shares in issue (m)

18.5

18.5

18.5

18.5

18.5

NAV per share (p)

1,277

1,348

1,276

1,378

1,507

Tangible NAV per share (p)

1,229

1,292

1,213

1,315

1,445

Return on average equity

72.9%

9.8%

11.1%

14.0%

15.6%

Normalised return on average equity

9.9%

8.9%

12.2%

15.1%

17.1%

Return on average TNAV

10.3%

9.3%

12.9%

15.9%

18.0%

Average loans

1,134.6

1,484.6

1,831.6

2,335.0

2,817.5

Average deposits

1,067.5

1,321.7

1,686.3

2,262.2

2,735.4

Loans/deposits

114.7%

107.8%

104.0%

103.0%

103.0%

Risk exposure

1,264.0

1,446.1

1,818.4

2,291.7

2,583.8

Common equity tier 1 ratio

18.0%

16.5%

13.2%

11.2%

10.7%

Source: STB data and Edison Investment Research forecasts

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Secure Trust Bank and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Secure Trust Bank and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Walker Greenbank — H1 dividend and full year guidance unchanged

Following H119 results, our full-year earnings estimates look attainable and are unchanged. Group strategy has been clearly stated, although a change in management may give rise to some shift of emphasis within Brands. Walker Greenbank’s share price is up from September lows, but has not really shown any appreciable recovery in a longer-term context and currently sits c 20% below our projected year-end NAV. The prospective dividend yield – heavily weighted towards final DPS – is now 5%.

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