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New tech and lower impairments

Secure Trust Bank 30 November 2021 Update
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Secure Trust Bank

New tech and lower impairments

Trading update

Banks

30 November 2021

Price

1,325p

Market cap

£246m

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

8.2

1.9

42.6

Rel (local)

10.1

3.5

26.3

52-week high/low

1,390p

850p

Business description

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

Next events

Q4 trading update

January 2022

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 (STB) announced that it has acquired AppToPay for an undisclosed ‘small amount’ and plans to use AppToPay’s proprietary technology platform to develop and grow its digital Buy Now Pay Later (BNPL) business. STB has also disclosed that its FY21 loan impairments will be ‘materially below’ analyst consensus of £12.9m (Edison: £12.7m). This is welcome news, although most investor attention regarding impairments has moved to focus on FY22. We are adjusting our FY21e EPS by 7% to 226.5p due to our now reduced £7.9m impairment estimate. All our other assumptions are unchanged, as detailed in our August 2021 update note, Good news as flagged. Our fair value remains 2,234p.

Year end

Operating income (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

165.5

38.7

180.2

87.2

7.4

6.6

12/20

166.1

20.1

85.2

44.0

15.6

3.3

12/21e

164.6

52.7

226.5

56.6

5.8

4.3

12/22e

191.3

36.3

156.6

39.1

8.5

3.0

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

AppToPay set to kick-start BNPL business

In its capital markets day earlier in November, STB’s management highlighted the opportunities it saw in the growth of BNPL as an alternative payment system and that entering this segment would be a focus for its retail finance business. It believes the acquisition of this working and proven technology will be a more cost-effective and faster solution than fully developing the platform in house. The deal is subject to regulatory approval, which should be helped by the fact that AppToPay is already authorised by the Financial Conduct Authority. STB expects the deal to complete in Q122 and to offer the product (branded as AppToPay) to its network of 1,400 retailers and 840,000 consumers in H122.

FY21e EPS raised by 7%

We have reduced our FY21 impairments assumptions from 53bp to 33bp, with the reductions in the motor finance and retail finance segments, where most of the IFRS 9 provisioning was carried out. After a 9bp annualised net impairment reversion in H121, we now forecast an annualised 75bp (previously 115bp) for the second half of FY21. Our forecast for FY22 remains 157bp (1.6% of average loans).

Valuation: Fair value of 2,234p per share

We obtain a fair value (FV) of 2,234p per share using a net asset value (NAV) approach. We continue to assume a sustainable return on equity (ROE) of 13.5%, a 10% cost of equity (COE) and 2% annual growth. The FV is the present value (PV) of the (ROE-g)/(COE-g) formula at end 2022 discounted to FY21. The 2,234p value implies an FY21e P/BV of 1.4x; STB is currently trading on a 0.8x P/BV ratio.

Exhibit 1: Financial summary

Year end 31 December

2018

2019

2020

2021e

2022e

£m except where stated

PROFIT & LOSS

Net interest income

133.7

145.4

150.9

149.0

169.8

Net commission income

17.9

20.1

15.2

15.6

21.5

Total operating income

151.6

165.5

166.1

164.6

191.3

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

(84.5)

(94.2)

(91.6)

(105.3)

(113.8)

Operating profit pre impairments & exceptionals

67.1

71.3

74.5

59.3

77.5

Impairment charges on loans

(32.4)

(32.6)

(51.3)

(7.9)

(42.2)

Losses on modification of financial assets

0.0

0.0

(3.1)

1.3

1.0

Other income

0.0

0.0

0.0

0.0

0.0

Profit before tax

34.7

38.7

20.1

52.7

36.3

Corporation Tax

(6.4)

(7.6)

(3.9)

(10.2)

(6.9)

Tax rate

18.4%

19.6%

19.4%

19.4%

19.0%

Profit after tax

28.3

31.1

16.2

42.5

29.4

Minority interests

0.0

0.0

0.0

0.0

0.0

Net income attributable to equity shareholders

28.3

31.1

16.2

42.5

29.4

Company reported pre-tax earnings adjustments

2.0

2.4

0.0

0.0

0.0

Reported underlying earnings after tax

29.9

33.5

16.2

42.5

29.4

Average basic number of shares in issue (m)

18.5

18.5

18.6

18.6

18.6

Average diluted number of shares in issue (m)

18.6

18.6

18.8

18.8

18.8

Reported diluted EPS (p)

152.2

167.3

85.2

226.5

156.6

Underlying diluted EPS (p)

161.0

180.2

85.2

226.5

156.6

Ordinary DPS (p)

83.0

87.2

44.0

56.6

39.1

Special DPS (p)

0.0

0.0

0.0

0.0

0.0

Net interest/average loans

7.32%

6.44%

6.32%

6.26%

6.28%

Impairments incl losses on loan modifications /average loans

1.79%

1.46%

2.26%

0.28%

1.53%

Cost income ratio

55.7%

56.9%

55.1%

64.0%

59.5%

BALANCE SHEET

Net customer loans

2,028.9

2,450.1

2,358.9

2,400.0

2,985.0

Other assets

415.4

232.7

305.2

327.3

331.7

Total assets

2,444.3

2,682.8

2,664.1

2,727.3

3,316.7

Total customer deposits

1,847.7

2,020.3

1,992.5

2,000.0

2,487.5

Other liabilities

359.5

408.4

401.1

425.8

507.2

Total liabilities

2,207.2

2,428.7

2,393.6

2,425.8

2,994.7

Net assets

237.1

254.1

270.5

301.5

322.0

Minorities

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

237.1

254.1

270.5

301.5

322.0

Reconciliation of movement in equity

Opening shareholders' equity

249.1

237.1

254.1

270.5

301.5

Profit in period

28.1

31.1

16.2

42.5

29.4

Other comprehensive income

(25.8)

0.0

(0.2)

(0.1)

0.0

Ordinary dividends

(14.8)

(15.5)

0.0

(11.9)

(10.5)

Special dividend

0.0

1.2

0.0

0.0

0.0

Share based payments

0.5

0.3

(0.7)

0.5

0.0

Issue of shares

0.0

0.0

1.1

0.0

0.0

Share issuance costs

0.0

0.0

0.0

0.0

0.0

Closing shareholders' equity

237.1

254.1

270.5

301.5

320.3

OTHER SELECTED DATA AND RATIOS

Period end shares in issue (m)

18.5

18.5

18.6

18.6

18.6

NAV per share (p)

1,283

1,375

1,453

1,619

1,721

Tangible NAV per share (p)

1,230

1,326

1,412

1,586

1,691

Return on average equity

11.6%

12.7%

6.2%

14.9%

9.4%

Return on average TNAV

13.3%

14.8%

6.7%

17.3%

11.5%

Average loans

1,826.4

2,258.9

2,389.0

2,379.5

2,692.5

Average deposits

1,655.4

1,967.8

2,010.3

2,002.8

2,243.8

Loans/deposits

109.8%

121.3%

118.4%

120.0%

120.0%

Risk exposure

1,824.6

2,118.1

2,001.5

2,101.3

2,565.3

Common equity tier 1 ratio

13.8%

12.7%

14.2%

14.4%

12.3%

Source: Secure Trust Bank, 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 £60,000 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 2021 Edison Investment Research Limited (Edison).

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

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

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

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 £60,000 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 2021 Edison Investment Research Limited (Edison).

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

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

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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