Secure Trust Bank — Reassuring pre-close

Secure Trust Bank (LSE: STB)

Last close As at 25/04/2024

GBP7.04

2.00 (0.28%)

Market capitalisation

GBP135m

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Research: Financials

Secure Trust Bank — Reassuring pre-close

Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.

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Financials

Secure Trust Bank

Reassuring pre-close

Pre-close update

Banks

22 January 2021

Price

940p

Market cap

£175m

Net debt/cash (£m)

N/M

Shares in issue

18.6m

Free float

84.5%

Code

STB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.3

42

(43.3)

Rel (local)

(3.4)

21.8

(37.0)

52-week high/low

1,675p

562p

Business description

Secure Trust Bank is a well-established specialist bank addressing niche markets within consumer and commercial banking.

Next events

FY20 results

25 March 2021

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

Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.

Year end

Operating income (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

151.6

36.7

161.0

83.0

5.8

8.8

12/19

165.5

41.1

177.3

87.2

5.3

9.3

12/20e

167.0

13.0

54.3

0.0

17.3

N/A

12/21e

172.9

31.6

134.7

0.0

7.0

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Positive underlying trends

Lending in the Real Estate Finance and Commercial Financial segments continued its strong rebound from Q3. Retail Finance saw strong pre-Christmas demand before the new restrictions. Repayment holidays peaked during mid-summer, but had already come down significantly by the end of Q320. They remained low in Q420 – Motor Finance, the most affected, only has 1.2% of customers with active repayment holidays, from a summer 2020 peak of 19.3%.

Uncertainty and flexibility remain

The COVID pandemic is not over, but there is light at the end of the tunnel. The short duration of STB’s loan book and management’s track record of timely adjustments to its lending stance are key positives. The strong capital position (we estimate FY20 CET at 13.9%) and current low funding costs further help STB’s strategic flexibility, which may include opportunistic acquisitions.

Valuation: Fair value 1,756p unchanged

We make no changes to our forecasts and maintain our fair value at 1,756p per share. We continue to assume a sustainable return on equity (ROE) of 13.5%, 10% cost of equity (COE) and 2% annual growth. We assume no value creation or dividends in 2020 and 2021 (although we believe a dividend could potentially be paid in 2021) and the fair value is the present value of the (ROE-g)/(COE-g) formula at the end of 2022. The 1,756p value implies an FY20e P/BV of 1.23x; STB trades on 0.66x.

Valuation

STB shares have risen by 45% in recent months which is comparable to its peer group. However, we note that the shares have fallen 45% from their 12-month high, more steeply than the average for its peers. Exhibit 2 compares STB’s market multiples with those of its peers. STB is trading at an FY20e P/BV of 0.66x compared with the 1.01x peer average. Its FY20e P/E of 17.3x is well above the sector average of 8.7x, because STB’s FY20 earnings are relatively more cyclically depressed. The FY21e P/E of 7.0x compares to 7.9x for the segment. We have excluded loss-making Metrobank from the peer average.

Exhibit 1: Challenger/specialist lender share price performance, %

One month

Three months

One year

Ytd

From 12m high

Secure Trust Bank

-0.4

44.7

-44.7

5.8

-44.9

Close Brothers

2.4

35.8

-10.0

2.7

-9.7

CYBG

0.7

48.3

-21.3

0.5

-30.4

Metrobank

17.1

126.0

-33.4

-4.0

-43.5

OneSavings Bank

2.3

43.5

4.0

0.8

-5.5

Paragon

4.5

50.9

0.6

0.5

-9.7

PCF Group

-7.5

11.4

-30.0

-18.3

-34.1

S&U

8.1

36.3

7.1

0.4

-9.2

Average

3.9

50.3

-11.9

-2.5

-20.3

Average ex-Metro

-4

-6

-33

8

-25

Source: Refinitiv, Edison Investment Research. Note: Prices as at 20 January 2021.

Exhibit 2: Challenger/specialist lender comparative table

Price
(p)

Market cap
(£m)

P/E (x) CY0e

P/E (x) CY1e

Dividend yield (%)*

ROE last reported

P/BV last reported

Secure Trust Bank

940

172.5

17.3

7.0

2.2

3.9

0.66

Close Brothers

1419

2138.7

18.6

14.4

2.8

7.8

1.48

CYBG

135

1944.5

17.3

9.6

0.0

1.4

0.39

Metrobank

134

231.8

-1.0

-1.7

0.0

-1.1

0.15

OneSavings Bank

427

1910.0

8.4

7.5

1.1

15.9

1.29

Paragon

491

1260.2

13.6

10.9

2.9

10.3

1.09

PCF Group

25

61.3

7.2

7.7

0.0

11.0

1.03

S&U

2270

275.4

4.1

3.7

5.3

16.8

1.76

Average ex-Metro

8.7

7.9

2.6

14.1

1.01

STB vs average ex-Metro

15%

11%

95%

-31%

-34%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 20 January 2021. *Trailing 12 months.

Exhibit 3 details our valuation of STB using the net asset value approach. STB has a solid track record of delivering value-creating ROEs (ie above the COE). This is reflected in our sustainable ROE assumption of 13.5%.

We value STB based on an NAV approach using the (ROE-g)/(COE-g) formula. We have maintained our assumptions of 13.5% sustainable ROE, 10% COE and a 2% increase in long-term earnings growth. We have assumed that this valuation is for end FY22 when the earnings will have started to normalise. We then discount this value back to end FY20. We have assumed no dividend payments in FY21 and FY22. This is very conservative, since we think there is a good chance that STB will pay dividends in 2021 and this will be quite likely in 2022. Besides our explicit forecasts for FY20 and FY21, we have assumed an 8% addition to equity in FY22 from retained earnings.

STB is a well-capitalised bank with a good business model that is still intact and that has shown resilience so far during this crisis. On fundamentals, the shares should be trading above the book value (our fair value is FY20e P/BV of 1.23x). We therefore believe that as clarity around the pandemic improves in 2021, there is significant room for these fundamentals to be reflected better in the shares.

Exhibit 3: STB valuation (net asset value approach*)

Return on equity (ROE, %)

13.5%

Cost of equity ((COE, %)

10.0%

Long-term growth (%)

2.0%

BV/share in FY21 (p)

1,426

BV/share in FY22 (p)

1,573

Indicated FV for FY22 per share (p)

2,215

PV of FY22 fair value per share (p)

1,756

Fair value of P/BV FY20 (x)

1.23

Current P/BV FY20 (x)

0.66

Source: Edison Investment Research. Note: *(ROE-g)/(COE-g). Priced at 20 January 2021

Exhibit 4: Financial summary

Year end December

2017

2018

2019

2020e

2021e

£m except where stated

PROFIT AND LOSS

Net interest income

114.6

133.7

145.4

152.9

153.9

Net commission income

14.9

17.9

20.1

14.1

19.0

Total operating income

129.5

151.6

165.5

167.0

172.9

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

(71.3)

(84.5)

(94.2)

(90.7)

(95.9)

Operating profit pre impairments & exceptionals

58.2

67.1

71.3

76.3

77.0

Impairment charges on loans

(33.5)

(32.4)

(32.6)

(56.8)

(45.4)

Losses on modification of financial assets

0.0

0.0

0.0

(6.6)

0.0

Other income

0.3

0.0

0.0

0.0

0.0

Pre-tax profit - continuing basis

25.0

34.7

38.7

13.0

31.6

Corporation tax

(5.1)

(6.4)

(7.6)

(2.8)

(6.3)

Tax rate

20.4%

18.4%

19.6%

21.4%

20.0%

Profit after tax - continuing basis

19.9

28.3

31.1

10.2

25.3

Discontinued business

3.9

0.0

0.0

0.0

0.0

(Loss)/profit for year

23.8

28.3

31.1

10.2

25.3

Minority interests

0.0

0.0

0.0

0.0

0.0

Net income attributable to equity shareholders

23.8

28.3

31.1

10.2

25.3

Company reported pre-tax earnings adjustments

2.0

2.0

2.4

0.0

0.0

Reported underlying pre-tax earnings

27.0

36.7

41.1

13.0

31.6

Reported underlying earnings after tax

21.5

29.9

33.0

10.2

25.3

Average basic number of shares in issue (m)

18.5

18.5

18.5

18.6

18.6

Average diluted number of shares in issue (m)

18.6

18.6

18.6

18.8

18.8

Reported diluted EPS (p)

107.0

152.2

167.3

54.3

134.7

Underlying diluted EPS (p)

115.6

161.0

177.3

54.3

134.7

Ordinary DPS (p)

79.0

83.0

87.2

0.0

0.0

Special DPS (p)

0.0

0.0

0.0

0.0

0.0

Net interest/average loans

7.72%

7.37%

6.49%

6.41%

6.29%

Impairments incl losses on loan modifications/average loans

2.30%

1.79%

1.46%

2.65%

1.85%

Cost income ratio

55.1%

55.7%

56.9%

54.3%

55.5%

BALANCE SHEET

Net customer loans

1,598.3

2,028.9

2,450.1

2,325.0

2,572.5

Other assets

293.3

415.4

232.7

258.3

285.8

Total assets

1,891.6

2,444.3

2,682.8

2,583.3

2,858.3

Total customer deposits

1,483.2

1,847.7

2,020.3

2,004.3

2,237.0

Other liabilities

159.3

359.5

408.4

313.4

330.5

Total liabilities

1,642.5

2,207.2

2,428.7

2,317.7

2,567.5

Net assets

249.1

237.1

254.1

265.6

290.9

Minorities

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

249.1

237.1

254.1

265.6

290.9

Reconciliation of movement in equity

Opening shareholders' equity

236.0

249.1

237.1

254.1

265.6

Profit in period

23.8

28.1

31.1

10.2

25.3

Other comprehensive income

2.9

(25.8)

0.0

0.0

0.0

Ordinary dividends

(14.0)

(14.8)

(15.5)

0.0

0.0

Special dividend

0.0

0.0

1.2

0.0

0.0

Share based payments

0.4

0.5

0.3

0.3

0.0

Issue of shares

0.0

0.0

0.0

1.0

0.0

Share issuance costs

0.0

0.0

0.0

0.0

0.0

Closing shareholders' equity

249.1

237.1

254.1

265.6

290.9

Other selected data and ratios

Period end shares in issue (m)

18.5

18.5

18.5

18.6

18.6

NAV per share (p)

1,348

1,283

1,375

1,426

1,562

Tangible NAV per share (p)

1,292

1,230

1,326

1,385

1,528

Return on average equity

9.8%

11.6%

12.7%

3.9%

9.1%

Normalised return on average equity

8.9%

12.3%

13.4%

3.9%

9.1%

Return on average TNAV

9.3%

13.3%

14.6%

4.3%

10.3%

Average loans

1,484.6

1,826.4

2,258.9

2,389.0

2,382.5

Average deposits

1,321.7

1,655.4

1,967.8

2,010.3

2,005.8

Loans/deposits

107.8%

109.8%

121.3%

116.0%

115.0%

Risk exposure

1,446.1

1,824.6

2,118.1

2,064.4

2,285.0

Common equity tier 1 ratio

16.5%

13.8%

12.7%

13.9%

13.4%

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Secure Trust Bank and prepared and issued by Edison, in consideration of a fee payable by Secure Trust Bank. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Schumannstrasse 34b

60325 Frankfurt

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London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

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General disclaimer and copyright

This report has been commissioned by Secure Trust Bank and prepared and issued by Edison, in consideration of a fee payable by Secure Trust Bank. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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