A reassuring trading update

Secure Trust Bank 17 October 2019 Update
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Secure Trust Bank

A reassuring trading update

Q319 trading update

Banks

17 October 2019

Price

1,330p

Market cap

£246m

Net debt/cash (£m)

N/M

Shares in issue

18.5m

Free float

84.5%

Code

STB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.8

(8.9)

(4.8)

Rel (local)

2.4

(5.1)

(6.7)

52-week high/low

1,590p

1,157.5p

Business description

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

Next events

FY19 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

Secure Trust Bank’s (STB’s) trading update for Q319 had a reassuring tone. The business trends and ‘overall results are in line with management expectations’. Management noted that demand slowed in September, but this is not a surprise given Brexit deadline concerns. STB has been in de-risking mode for several quarters and has been repositioning its loan book in anticipation of economic and political uncertainties. At the same time, the short duration of its loan book allows it to respond quickly as the lending environment changes. We are not making changes to forecasts or our fair value of 2,428p per share.

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

11.4

5.9

12/18

151.6

36.7

162.0

83.0

8.2

6.2

12/19e

170.9

42.1

179.5

87.2

7.4

6.6

12/20e

186.2

52.7

227.3

91.5

5.9

6.9

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

Brexit uncertainty

The Brexit uncertainty has led to some borrowers holding back ahead of the 31 October deadline. This has been mainly in the real estate finance division (representing 29% of STB’s H119 lending revenue net of impairments). STB warned that political developments could have an impact on the economy and STB’s Q419 results. However, this slowdown could lead to a pronounced catch-up in activity after the Brexit outcome becomes clearer. Retail demand has been little affected, as unemployment remains low and wage growth is good.

Unaffected by FCA motor fee changes

The Financial Conduct Authority (FCA) announced on 15 October it was planning to ban some commission arrangements between lenders and some car retailers and motor finance brokers. These are commissions that are linked to the interest rate the customer pays that the broker has the power to set or adjust. STB does not expect any negative impact from these proposed changes as it has never employed any of these commission structures across its business.

Valuation: Unchanged at 2,428p per share

We are not changing our forecasts but are reassured by the update. We are expecting a normalised return on equity of 14.4% in 2019 and see this reaching 18.7% by 2021. Our dividend discount model-derived fair value remains 2,428p implying a 2019 P/NAV of 1.8x. We forecast STB to continue to deliver returns considerably above its 10% cost of equity. As such, a significant premium to the current P/BV of 1.0x seems justified. STB is paying an attractive current year dividend yield of 6.6%, which is set to grow.

FCA planned motor changes

The consultation paper issued on 15 October followed the FCA’s findings of its investigation into the motor finance commission practices published in March 2019. In the report, the FCA was concerned about commission models linked to motor finance interest rates that the brokers had a ‘wide discretion to set or adjust’. This generated a conflict of interest (no pun intended) where the higher the interest rate set by the broker, the bigger the commission. The FCA estimated that this was costing customers as much as £300m a year when compared to flat fee models.

These discretionary commission models generally had three formats: (1) increasing difference in charges (DIC), (2) reducing DIC and (3) scaled commission models. In the first format, there is a minimum interest rate and the broker is paid according to how much higher than the minimum they are able to charge their customer. In the second, there is a maximum interest rate and what the broker receives is based on the difference between interest they are charging and the maximum allowed. In the last format, the fee paid varies directly with the interest rate within certain parameters.

The FCA made the point that the first two are more damaging than the scaled commission models, but all of them are unhealthy and the FCA is planning to ban these arrangements. It wants to sever the link between interest rates paid by customers and broker fees. The FCA proposal would allow for variable commission models for brokers, but not one based on customer interest rates. This would allow, for example, higher fees being charged for customers who required more work from the broker.

In addition, the FCA also found high levels of non-compliance in terms of disclosure requirements as described in its Consumer Credit sourcebook. The FCA is planning to make some minor changes to make compliance easier and with greater certainty.

The finalisation of these new rules is expected by the beginning of Q220.

Since STB does not operate with these discretionary commission models it does not expect to have any negative impact from these changes. STB expects that as a result of these changes, there may conceivably be some increase in new car prices, with a knock-on positive effect on the used car market. This would help STB as its V12 Vehicle Finance partnership with Aston Barclay is focused on working with dealers in the used car finance segment, including dealer stock funding.

Exhibit 1: Financial summary

Year end 31 December

2016

2017

2018

2019e

2020e

2021e

£m except where stated

Profit and loss

Net interest income

92.5

114.6

133.7

148.8

162.1

177.8

Net commission income

14.5

14.9

17.9

22.1

24.0

27.2

Total operating income

107.0

129.5

151.6

170.9

186.2

205.0

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

(64.3)

(71.3)

(84.5)

(97.4)

(104.2)

(111.7)

Operating profit pre impairments & exceptionals

42.7

58.2

67.1

73.5

82.0

93.3

Impairment charges on loans

(23.3)

(33.5)

(32.4)

(33.2)

(31.2)

(32.5)

Other income

0.0

0.3

0.0

0.0

0.0

0.0

Operating profit post impairments

19.4

25.0

34.7

40.3

50.8

60.8

Non-recurring items

0.0

0.0

0.0

0.0

0.0

0.0

Pre-tax profit - continuing basis

19.4

25.0

34.7

40.3

50.8

60.8

Corporation Tax

(5.2)

(5.1)

(6.4)

(7.8)

(8.6)

(10.3)

Tax rate

26.8%

20.4%

18.4%

19.3%

17.0%

17.0%

Bank tax surcharge

0.0

0.0

0.0

(1.0)

(2.1)

(2.9)

Profit after tax - continuing basis

14.2

19.9

28.3

31.5

40.1

47.6

Discontinued business

123.3

3.9

0.0

0.0

0.0

0.0

(Loss)/profit for year

137.5

23.8

28.3

31.5

40.1

47.6

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Net income attributable to equity shareholders

137.5

23.8

28.3

31.5

40.1

47.6

Company reported pre-tax earnings adjustments

7.9

2.0

2.0

1.8

1.9

0.0

Reported underlying pre-tax earnings

27.3

27.0

36.7

42.1

52.7

60.8

Reported underlying earnings after tax

20.6

21.5

29.9

33.2

42.0

47.6

Average basic number of shares in issue (m)

18.5

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

18.6

Reported diluted EPS (p)

77.3

107.0

152.2

169.5

215.8

256.1

Underlying diluted EPS (p)

113.0

116.4

162.0

179.5

227.3

257.7

Ordinary DPS (p)

75.0

79.0

83.0

87.2

91.5

92.6

Special DPS (p)

165.0

0.0

0.0

0.0

0.0

0.0

Net interest/average loans

8.15%

7.72%

7.37%

6.68%

6.15%

5.84%

Impairments/average loans

2.04%

2.30%

1.79%

1.49%

1.18%

1.07%

Cost income ratio

60.1%

55.1%

55.7%

57.0%

56.0%

54.5%

Balance sheet

Net customer loans

1,321.0

1,598.3

2,028.9

2,428.5

2,841.4

3,249.6

Other assets

189.0

293.3

415.4

428.6

443.5

485.6

Total assets

1,510.0

1,891.6

2,444.3

2,857.0

3,284.9

3,735.2

Total customer deposits

1,151.8

1,483.2

1,847.7

2,248.6

2,583.1

3,008.9

Other liabilities

122.2

159.3

359.5

345.3

361.8

379.4

Total liabilities

1,274.0

1,642.5

2,207.2

2,603.3

3,007.4

3,419.6

Net assets

236.0

249.1

237.1

253.7

277.5

315.6

Minorities

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders’ equity

236.0

249.1

237.1

253.7

277.5

315.6

Reconciliation of movement in equity

Opening shareholders’ equity

141.2

236.0

249.1

237.1

253.7

277.5

Profit in period

137.5

23.8

28.1

31.5

40.1

55.1

Other comprehensive income

(1.8)

2.9

(25.8)

0.0

0.0

0.0

Ordinary dividends

(13.1)

(14.0)

(14.8)

(15.5)

(16.3)

(17.1)

Special dividend

(30.0)

0.0

0.0

0.0

0.0

0.0

Share based payments

0.2

0.4

0.5

0.6

0.0

0.0

Issue of shares

2.0

0.0

0.0

0.0

0.0

0.0

Share issuance costs

0.0

0.0

0.0

0.0

0.0

0.0

Closing shareholders’ equity

236.0

249.1

237.1

253.7

277.5

315.6

Other selected data and ratios

Period end shares in issue (m)

18.5

18.5

18.5

18.5

18.5

18.5

NAV per share (p)

1,277

1,348

1,283

1,424

1,840

1,878

Tangible NAV per share (p)

1,229

1,292

1,230

1,364

1,779

1,828

Return on average equity

72.9%

9.8%

11.6%

12.6%

13.3%

13.9%

Normalised return on average equity

9.9%

8.9%

12.8%

14.1%

17.3%

18.9%

Return on average TNAV

10.3%

9.3%

13.4%

14.8%

18.0%

19.8%

Average loans

1,134.6

1,484.6

1,826.4

2,253.5

2,442.5

2,635.0

Average deposits

1,067.5

1,321.7

1,655.4

2,024.8

2,234.6

2,427.8

Loans/deposits

114.7%

107.8%

109.8%

108.0%

110.0%

108.0%

Risk exposure

1,264.0

1,446.1

1,824.6

2,175.8

2,522.0

2,878.9

Common equity tier 1 ratio

18.0%

16.5%

13.8%

12.1%

11.2%

11.1%

Source: Secure Trust Bank accounts, Edison Investment Research


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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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

1,185 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

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

1,185 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

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

1,185 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

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

1,185 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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