Positive pre-close

Secure Trust Bank 15 January 2020 Update
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Secure Trust Bank

Positive pre-close

FY19 trading update

Banks

15 January 2020

Price

1,610p

Market cap

£298m

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

0.0

33.1

33.1

Rel (local)

(3.2)

25.0

18.4

52-week high/low

1,660p

1,158p

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 results

March 2020

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 trading update indicates that FY19 results should be in line with expectations, despite the economic slowdown dampening loan demand in the second half of 2019. STB highlighted its strong control over risk while interest margins have been stable. The bank is cautiously optimistic about 2020 and is well positioned, with healthy capital, good liquidity and new business pipelines. STB does not envisage material changes to 2020 guidance, and we are maintaining our estimates and 2,428p per share valuation.

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

13.8

4.9

12/18

151.6

36.7

162.0

83.0

9.9

5.2

12/19e

170.9

42.1

179.5

87.2

9.0

5.4

12/20e

186.2

52.7

227.3

91.5

7.1

5.7

12/21e

205.0

60.8

257.7

92.6

6.2

5.7

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

Careful navigation bearing fruit

We believe that STB’s cautious lending stance and business repositioning has helped it deliver solid 2019 numbers (we forecast 2019 pre-tax earnings +16% year-on-year, ROTE of 14.8%) and it is well positioned to adjust if business picks up following the UK general election. The positive tone regarding risk control is reassuring given that the economy was sluggish during the second half of the year. The bank has indicated that impairment rates are running lower than at mid-2019.

Ready for growth

We continue to forecast 17% and 14% growth in loans for STB in 2020 and 2021, respectively. This should help drive underlying pre-tax earnings from the forecast £42.1m in 2019 to £60.8m in 2021. There are still some question marks regarding the UK economy in the short and medium term but, if the economic backdrop is supportive, STB should conceivably be able to deliver on these forecasts.

Valuation: 2,428p unchanged

We make no changes to our forecasts and maintain our fair value at 2,428p per share (based on a dividend discount model), equivalent to a 2020 P/NTA of 1.6x. The bank’s shares are up 33% over the last 12 months, but our fair value estimate is still 51% above the current share price, offering attractive upside potential. The dividend yield of 5.7% (2020e) is above the average of STB’s peers.

Valuation

STB’s share price is up 38% since its 9 October 2019 trough of 1,200p. It is not the only stock to have benefited from the UK general election rebound, but it has been an outperformer. Over the last 12 months, it is the top performer among peers (see Exhibit 1). Clearly, STB’s shares have benefited from the bank’s solid results, the reassuring updates and a cautious, flexible strategy.

Our fair value for STB is unchanged at 2,428p, 51% above the current share price of 1,610p. Our fair value is derived using a dividend discount model. The fair value is equal to 1.6x 2020e P/NTA. We forecast an ROTE of 18.0% in 2020 and 19.8% in 2021, hence a fair value well in excess of tangible book value is fully justified, in our view.

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

One month

Three months

One year

Ytd

From 12m high

Secure Trust Bank

0.0

33.1

33.1

0.6

-6.9

1PM

7.1

28.2

-12.8

8.7

-27.2

Close Brothers

-1.6

20.3

5.7

0.1

-3.8

CYBG

-19.0

38.4

-6.9

-7.0

-21.0

Metrobank

0.6

-4.8

-89.3

-3.9

-91.1

OneSavings Bank

-6.3

16.0

11.4

-3.8

-9.6

Paragon

-7.4

1.9

20.7

-8.1

-10.9

PCF Group

-2.8

27.8

-2.6

-1.4

-12.0

S&U

1.0

1.9

3.4

0.5

-13.8

Average

-3.6

16.2

-8.8

-1.9

-23.7

Average ex-Metro

-4.2

19.2

2.7

-1.6

-14.0

Source: Refinitiv, Edison Investment Research. Note: Prices as at 14 January 2020.

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

1,610

297.5

9.9

9.0

5.2

11.6

1.24

1PM

37.5

33.4

5.7

5.1

2.2

13.0

1.00

Close Brothers

1,599

2419.4

11.9

11.7

4.1

14.9

1.72

CYBG

175.35

2518.4

7.4

7.4

0.0

9.8

0.50

Metrobank

198.1

341.6

66.3

-31.0

0.0

2.9

0.14

OneSavings Bank

416.8

1856.6

7.2

6.7

3.5

22.3

1.50

Paragon

495.2

1269.8

9.8

9.2

4.3

10.3

1.17

PCF Group

34.5

86.3

11.5

9.0

1.2

11.0

1.47

S&U

2120

256.9

7.0

6.3

3.2

17.6

1.64

Average

15.9

3.0

2.3

12.7

Average ex-Metro

8.7

7.9

2.6

14.1

STB vs average ex-Metro

15%

11%

95%

-31%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 14 January 2020.

Exhibit 3: Financial summary

Year end 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 (ex discontinued 2015/16)

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: Company 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.

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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.

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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.

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Frankfurt +49 (0)69 78 8076 960

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New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

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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

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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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

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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