Secure Trust Bank — FY23 underlying PBT broadly maintained

Secure Trust Bank (LSE: STB)

Last close As at 26/02/2024

GBP7.12

2.00 (0.28%)

Market capitalisation

GBP136m

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Research: Financials

Secure Trust Bank — FY23 underlying PBT broadly maintained

Secure Trust Bank’s (STB’s) Q423 trading update showcased a robust performance with net loans of £3.3bn, up 13.6% y-o-y. The bank reaffirmed that it is on track to deliver £5m in annualised cost savings in FY24 through its ongoing cost optimisation programme. Despite rising deposit costs, STB’s net interest margin (NIM) remained flat with H123 at 5.4%. STB’s disclosure of modest exposure to discretionary commissions in motor finance lending should be a relief to investors, as the ongoing Financial Conduct Authority (FCA) investigation has been an uncertainty overhanging the sector. Our underlying continuing PBT estimates fell by 2% on marginally lower NIM expectations. Meanwhile, we have reduced our continuing PBT estimate by 7% to £41.7m as we have included a £2.3m exceptional cost related to the FCA’s Borrowers in Financial Difficulty industry-wide review. Our FY24 estimates are unchanged.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

Secure Trust Bank

FY23 underlying PBT broadly maintained

Q423 update

Banks

6 February 2024

Price

736p

Market cap

£140m

CET1 ratio at H123

13.0%

Shares in issue

19.0m

Free float

90.5%

Code

STB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.1

23.3

(2.4)

Rel (local)

8.2

19.6

1.9

52-week high/low

802p

550p

Business description

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

Next events

FY23 results

21 March 2024

Analysts

Rob Murphy

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

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

Secure Trust Bank’s (STB’s) Q423 trading update showcased a robust performance with net loans of £3.3bn, up 13.6% y-o-y. The bank reaffirmed that it is on track to deliver £5m in annualised cost savings in FY24 through its ongoing cost optimisation programme. Despite rising deposit costs, STB’s net interest margin (NIM) remained flat with H123 at 5.4%. STB’s disclosure of modest exposure to discretionary commissions in motor finance lending should be a relief to investors, as the ongoing Financial Conduct Authority (FCA) investigation has been an uncertainty overhanging the sector. Our underlying continuing PBT estimates fell by 2% on marginally lower NIM expectations. Meanwhile, we have reduced our continuing PBT estimate by 7% to £41.7m as we have included a £2.3m exceptional cost related to the FCA’s Borrowers in Financial Difficulty industry-wide review. Our FY24 estimates are unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

148.9

55.9

239.4

61.1

3.1

8.3

12/22

169.6

39.0

174.7

45.1

4.2

6.1

12/23e

186.5

41.7

154.9

39.7

4.8

5.4

12/24e

221.8

55.0

211.4

53.1

3.5

7.2

Note: *PBT from continuing operations. **Fully diluted.

Robust loan growth and new chairman announced

STB achieved record new lending across all its divisions and all divisions reported net lending growth in Q423. Real Estate Finance rose 3.1% q-o-q and 11.5% y-o-y, while Consumer Lending was up 3.2% q-o-q and 18.4% y-o-y. Year-on-year total new business lending rose 30% but was flat q-o-q. Within this, new lending in Business Finance surged 287% y-o-y but declined 13.6% q-o-q. Consumer Finance new lending advanced 2.3% y-o-y and 7.1% q-o-q. The bank also announced that Jim Brown, incumbent CEO of Sainsbury’s Bank, will join STB as non-executive director effective 31 March 2024, and will succeed Lord Forsyth as chairman following the AGM on 16 May 2024 (subject to regulatory approval).

Underlying FY23 PBT is solid, FY24 unchanged

The bank announced that in H223 it had entered a formal process with the FCA relating to the bank’s collections processes in Vehicle Finance, following an industry-wide review. In response, we have included an exceptional cost of £2.3m in FY23 to cover the expenses associated with the review process. The review is expected to close in H124. Additionally, the bank announced its NIM was in line with H123, so we have marginally lowered our NIM to 5.4% for FY23. Thus, continuing and underlying continuing PBT is £41.7m and £44.0m, 7% and 2% lower than previous expectations, respectively. FY24 estimates are unchanged.

Valuation: Still undervalued compared to peers

Based on our FY23 estimates, STB trades at a diluted price to book value (P/BV) of 0.41x and a P/E of only 4.8x. To trade in line with peers, the implied valuation for STB should be closer to c 0.6x or 1,077p/share, representing an upside of 46%.

Estimate changes and clarity on FCA review

In the trading update, STB clarified that between 2014 and 2017, only a mid-single digit proportion of new vehicle loans represented such arrangements. Given its minor representation in the bank’s lending book, we anticipate any costs associated with the review to be modest. The FCA is expected to report back on its findings in Q324.

In a separate matter, STB is in formal discussions (in common with industry peers) with the FCA regarding its collection processes in Vehicle Finance, as part of the FCA’s Borrowers in Financial Difficulty industry-wide review. The bank has enlisted external support to assist in the review and to enhance its collections process in alignment with FCA standards, where appropriate. STB anticipates the review to conclude by the end of H124. We have accounted for the cost of the review by including a £2.3m expense in the accounts.

Additionally, STB reported that its NIM was flat with H123 at 5.4%, a touch below our FY23 estimates and the medium-term target of at least 5.5%. Adjusting for this, our FY23 operating income estimates have marginally reduced by 1% to £187m. Combined with the £2.3m charge, our continuing PBT estimates have dropped by 7.2% to £41.7m. On an underlying basis however, just incorporating the lower NIM expectations, continuing PBT is £44.0m, 2% lower than our previous estimate.

Consequently, EPS fell 7.6% to 158.9p. The EPS also includes the updated, increased share count which exacerbated the downgrade. In line with this, our DPS estimate decreased by 5% to 39.7p.

Our estimates for FY24 are unchanged, bar the adjustment for the share count increase.

Exhibit 1: Estimate changes

£m unless stated otherwise

FY23e

FY24e

Old

New

Change

Old

New

Change

Operating income

188.5

186.5

(1.1%)

221.8

221.8

0.0%

Continuing PBT

45.0

41.7

(7.2%)

55.0

55.0

0.0%

Underlying continuing PBT

45.0

44.0

(2.2%)

55.0

55.0

0.0%

Basic EPS (p)

172.0

158.9

(7.6%)

217.9

216.8

(0.5%)

Diluted EPS (p)

167.7

154.9

(7.6%)

212.4

211.4

(0.5%)

DPS (p)

42.0

39.7

(5.4%)

53.1

53.1

0.0%

Source: Edison Investment Research

Exhibit 2: Financial summary

Year-end December (£m unless stated otherwise)

2019

2020

2021

2022

2023e

2024e

Profit and loss

Net interest income

145.4

150.9

136.2

152.6

168.4

202.4

Net commission income

20.1

15.2

12.7

17.0

18.1

19.4

Total operating income

165.5

166.1

148.9

169.6

186.5

221.8

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

(94.2)

(92.6)

(89.4)

(93.2)

(100.7)

(115.3)

Operating profit pre impairments & exceptionals

71.3

73.5

59.5

76.4

85.8

106.5

Impairment charges on loans

(32.6)

(51.3)

(5.0)

(38.2)

(42.8)

(51.5)

Losses on modification of financial assets

0.0

(3.1)

1.5

1.1

0.2

0.0

Non-recurring items and other income/(costs)

0.0

0.0

(0.1)

(0.3)

0.9

0.0

Exceptional costs relating to FCA review of BiFD

0.0

0.0

0.0

0.0

(2.3)

0.0

PBT – continuing basis

38.7

19.1

55.9

39.0

41.7

55.0

Corporation taxes

(7.6)

(3.7)

(10.4)

(9.4)

(10.4)

(13.7)

Profit after tax - continuing basis

31.1

15.4

45.5

29.6

31.3

41.2

PBT - discontinued businesses

0.0

0.0

0.1

5.0

(2.0)

0.0

Tax on discontinued businesses

0.0

0.0

0.0

(0.9)

0.5

0.0

PBT - total reported

38.7

19.1

56.0

44.0

39.7

55.0

Profit after tax - total reported

31.1

15.4

45.6

33.7

29.8

41.2

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Net attributable income

31.1

15.4

45.6

33.7

29.8

41.2

Tax rate

20%

19%

19%

24%

25%

25%

Average basic number of shares in issue (m)

18.5

18.6

18.6

18.7

18.8

19.0

Average diluted number of shares in issue (m)

18.7

19.0

19.0

19.3

19.2

19.5

Basic reported EPS (p)

168.7

82.7

244.7

180.5

158.9

216.8

Reported diluted EPS (p)

166.7

81.0

239.4

174.7

154.9

211.4

Ordinary DPS (p)

87.2

44.0

61.1

45.1

39.7

53.1

Net interest/average loans

6.4%

6.3%

5.6%

5.6%

5.4%

5.7%

Cost of risk

1.4%

2.3%

0.1%

1.4%

1.4%

1.5%

Cost income ratio

56.9%

55.8%

60.0%

55.0%

54.0%

52.0%

Balance sheet

Net customer loans

2,450.1

2,358.9

2,530.6

2,919.5

3,315.3

3,745.0

Other assets

230.6

302.3

355.1

460.3

495.4

535.0

Total assets

2,680.7

2,661.2

2,885.7

3,379.8

3,810.7

4,280.0

Total customer deposits

2,020.3

1,992.5

2,103.2

2,514.6

2,866.8

3,200.9

Other liabilities

408.4

401.1

480.3

538.8

596.2

700.6

Total liabilities

2,428.7

2,393.6

2,583.5

3,053.4

3,460.5

3,898.9

Net assets

252.0

267.6

302.2

326.4

350.2

381.1

Minorities

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

252.0

267.6

302.2

326.4

350.2

381.1

Other selected data and ratios

NAV per share (p)

1,364

1,438

1,622

1,748

1,841.2

2,003.8

Tangible NAV per share (p)

1,315

1,396

1,584

1,713

1,807.0

1,969.6

Return on average equity

12.7%

5.9%

16.0%

10.7%

8.8%

11.3%

Return on average TNAV

14.8%

6.4%

18.6%

11.4%

9.0%

11.5%

Average loans

2,258.9

2,389.0

2,444.8

2,725.1

3,117.4

3,530.2

Average deposits

1,967.8

2,010.3

2,002.8

2,308.9

2,690.7

3,033.8

Loans/deposits

121%

118%

120%

116%

116%

117%

Risk exposure

2,118.1

1,999.7

2,087.4

2,335.0

2,752.7

3,059.7

Common equity tier 1 ratio

12.6%

14.0%

14.5%

14.0%

12.4%

12.0%

Source: Secure Trust Bank, 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 £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.

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United Kingdom

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 2024 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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