Last close As at 05/08/2026
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Market capitalisation
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Research: Financials
Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.
Written by
Secure Trust Bank |
Reassuring pre-close |
Pre-close update |
Banks |
22 January 2021 |
Share price performance
Business description
Next events
Analysts
Secure Trust Bank is a research client of Edison Investment Research Limited |
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Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.
Year end |
Operating income (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
151.6 |
36.7 |
161.0 |
83.0 |
5.8 |
8.8 |
12/19 |
165.5 |
41.1 |
177.3 |
87.2 |
5.3 |
9.3 |
12/20e |
167.0 |
13.0 |
54.3 |
0.0 |
17.3 |
N/A |
12/21e |
172.9 |
31.6 |
134.7 |
0.0 |
7.0 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Positive underlying trends
Lending in the Real Estate Finance and Commercial Financial segments continued its strong rebound from Q3. Retail Finance saw strong pre-Christmas demand before the new restrictions. Repayment holidays peaked during mid-summer, but had already come down significantly by the end of Q320. They remained low in Q420 – Motor Finance, the most affected, only has 1.2% of customers with active repayment holidays, from a summer 2020 peak of 19.3%.
Uncertainty and flexibility remain
The COVID pandemic is not over, but there is light at the end of the tunnel. The short duration of STB’s loan book and management’s track record of timely adjustments to its lending stance are key positives. The strong capital position (we estimate FY20 CET at 13.9%) and current low funding costs further help STB’s strategic flexibility, which may include opportunistic acquisitions.
Valuation: Fair value 1,756p unchanged
We make no changes to our forecasts and maintain our fair value at 1,756p per share. We continue to assume a sustainable return on equity (ROE) of 13.5%, 10% cost of equity (COE) and 2% annual growth. We assume no value creation or dividends in 2020 and 2021 (although we believe a dividend could potentially be paid in 2021) and the fair value is the present value of the (ROE-g)/(COE-g) formula at the end of 2022. The 1,756p value implies an FY20e P/BV of 1.23x; STB trades on 0.66x.
Valuation
STB shares have risen by 45% in recent months which is comparable to its peer group. However, we note that the shares have fallen 45% from their 12-month high, more steeply than the average for its peers. Exhibit 2 compares STB’s market multiples with those of its peers. STB is trading at an FY20e P/BV of 0.66x compared with the 1.01x peer average. Its FY20e P/E of 17.3x is well above the sector average of 8.7x, because STB’s FY20 earnings are relatively more cyclically depressed. The FY21e P/E of 7.0x compares to 7.9x for the segment. We have excluded loss-making Metrobank from the peer average.
Exhibit 1: Challenger/specialist lender share price performance, %
One month |
Three months |
One year |
Ytd |
From 12m high |
|
Secure Trust Bank |
-0.4 |
44.7 |
-44.7 |
5.8 |
-44.9 |
Close Brothers |
2.4 |
35.8 |
-10.0 |
2.7 |
-9.7 |
CYBG |
0.7 |
48.3 |
-21.3 |
0.5 |
-30.4 |
Metrobank |
17.1 |
126.0 |
-33.4 |
-4.0 |
-43.5 |
OneSavings Bank |
2.3 |
43.5 |
4.0 |
0.8 |
-5.5 |
Paragon |
4.5 |
50.9 |
0.6 |
0.5 |
-9.7 |
PCF Group |
-7.5 |
11.4 |
-30.0 |
-18.3 |
-34.1 |
S&U |
8.1 |
36.3 |
7.1 |
0.4 |
-9.2 |
Average |
3.9 |
50.3 |
-11.9 |
-2.5 |
-20.3 |
Average ex-Metro |
-4 |
-6 |
-33 |
8 |
-25 |
Source: Refinitiv, Edison Investment Research. Note: Prices as at 20 January 2021.
Exhibit 2: Challenger/specialist lender comparative table
Price |
Market cap |
P/E (x) CY0e |
P/E (x) CY1e |
Dividend yield (%)* |
ROE last reported |
P/BV last reported |
|
Secure Trust Bank |
940 |
172.5 |
17.3 |
7.0 |
2.2 |
3.9 |
0.66 |
Close Brothers |
1419 |
2138.7 |
18.6 |
14.4 |
2.8 |
7.8 |
1.48 |
CYBG |
135 |
1944.5 |
17.3 |
9.6 |
0.0 |
1.4 |
0.39 |
Metrobank |
134 |
231.8 |
-1.0 |
-1.7 |
0.0 |
-1.1 |
0.15 |
OneSavings Bank |
427 |
1910.0 |
8.4 |
7.5 |
1.1 |
15.9 |
1.29 |
Paragon |
491 |
1260.2 |
13.6 |
10.9 |
2.9 |
10.3 |
1.09 |
PCF Group |
25 |
61.3 |
7.2 |
7.7 |
0.0 |
11.0 |
1.03 |
S&U |
2270 |
275.4 |
4.1 |
3.7 |
5.3 |
16.8 |
1.76 |
Average ex-Metro |
8.7 |
7.9 |
2.6 |
14.1 |
1.01 |
||
STB vs average ex-Metro |
15% |
11% |
95% |
-31% |
-34% |
Source: Refinitiv, Edison Investment Research. Note: Prices as at 20 January 2021. *Trailing 12 months.
Exhibit 3 details our valuation of STB using the net asset value approach. STB has a solid track record of delivering value-creating ROEs (ie above the COE). This is reflected in our sustainable ROE assumption of 13.5%.
We value STB based on an NAV approach using the (ROE-g)/(COE-g) formula. We have maintained our assumptions of 13.5% sustainable ROE, 10% COE and a 2% increase in long-term earnings growth. We have assumed that this valuation is for end FY22 when the earnings will have started to normalise. We then discount this value back to end FY20. We have assumed no dividend payments in FY21 and FY22. This is very conservative, since we think there is a good chance that STB will pay dividends in 2021 and this will be quite likely in 2022. Besides our explicit forecasts for FY20 and FY21, we have assumed an 8% addition to equity in FY22 from retained earnings.
STB is a well-capitalised bank with a good business model that is still intact and that has shown resilience so far during this crisis. On fundamentals, the shares should be trading above the book value (our fair value is FY20e P/BV of 1.23x). We therefore believe that as clarity around the pandemic improves in 2021, there is significant room for these fundamentals to be reflected better in the shares.
Exhibit 3: STB valuation (net asset value approach*)
Return on equity (ROE, %) |
13.5% |
Cost of equity ((COE, %) |
10.0% |
Long-term growth (%) |
2.0% |
BV/share in FY21 (p) |
1,426 |
BV/share in FY22 (p) |
1,573 |
Indicated FV for FY22 per share (p) |
2,215 |
PV of FY22 fair value per share (p) |
1,756 |
Fair value of P/BV FY20 (x) |
1.23 |
Current P/BV FY20 (x) |
0.66 |
Source: Edison Investment Research. Note: *(ROE-g)/(COE-g). Priced at 20 January 2021
Exhibit 4: Financial summary
Year end December |
2017 |
2018 |
2019 |
2020e |
2021e |
£m except where stated |
|||||
PROFIT AND LOSS |
|||||
Net interest income |
114.6 |
133.7 |
145.4 |
152.9 |
153.9 |
Net commission income |
14.9 |
17.9 |
20.1 |
14.1 |
19.0 |
Total operating income |
129.5 |
151.6 |
165.5 |
167.0 |
172.9 |
Total G&A expenses (exc non-recurring items below) |
(71.3) |
(84.5) |
(94.2) |
(90.7) |
(95.9) |
Operating profit pre impairments & exceptionals |
58.2 |
67.1 |
71.3 |
76.3 |
77.0 |
Impairment charges on loans |
(33.5) |
(32.4) |
(32.6) |
(56.8) |
(45.4) |
Losses on modification of financial assets |
0.0 |
0.0 |
0.0 |
(6.6) |
0.0 |
Other income |
0.3 |
0.0 |
0.0 |
0.0 |
0.0 |
Pre-tax profit - continuing basis |
25.0 |
34.7 |
38.7 |
13.0 |
31.6 |
Corporation tax |
(5.1) |
(6.4) |
(7.6) |
(2.8) |
(6.3) |
Tax rate |
20.4% |
18.4% |
19.6% |
21.4% |
20.0% |
Profit after tax - continuing basis |
19.9 |
28.3 |
31.1 |
10.2 |
25.3 |
Discontinued business |
3.9 |
0.0 |
0.0 |
0.0 |
0.0 |
(Loss)/profit for year |
23.8 |
28.3 |
31.1 |
10.2 |
25.3 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Net income attributable to equity shareholders |
23.8 |
28.3 |
31.1 |
10.2 |
25.3 |
Company reported pre-tax earnings adjustments |
2.0 |
2.0 |
2.4 |
0.0 |
0.0 |
Reported underlying pre-tax earnings |
27.0 |
36.7 |
41.1 |
13.0 |
31.6 |
Reported underlying earnings after tax |
21.5 |
29.9 |
33.0 |
10.2 |
25.3 |
Average basic number of shares in issue (m) |
18.5 |
18.5 |
18.5 |
18.6 |
18.6 |
Average diluted number of shares in issue (m) |
18.6 |
18.6 |
18.6 |
18.8 |
18.8 |
Reported diluted EPS (p) |
107.0 |
152.2 |
167.3 |
54.3 |
134.7 |
Underlying diluted EPS (p) |
115.6 |
161.0 |
177.3 |
54.3 |
134.7 |
Ordinary DPS (p) |
79.0 |
83.0 |
87.2 |
0.0 |
0.0 |
Special DPS (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Net interest/average loans |
7.72% |
7.37% |
6.49% |
6.41% |
6.29% |
Impairments incl losses on loan modifications/average loans |
2.30% |
1.79% |
1.46% |
2.65% |
1.85% |
Cost income ratio |
55.1% |
55.7% |
56.9% |
54.3% |
55.5% |
BALANCE SHEET |
|||||
Net customer loans |
1,598.3 |
2,028.9 |
2,450.1 |
2,325.0 |
2,572.5 |
Other assets |
293.3 |
415.4 |
232.7 |
258.3 |
285.8 |
Total assets |
1,891.6 |
2,444.3 |
2,682.8 |
2,583.3 |
2,858.3 |
Total customer deposits |
1,483.2 |
1,847.7 |
2,020.3 |
2,004.3 |
2,237.0 |
Other liabilities |
159.3 |
359.5 |
408.4 |
313.4 |
330.5 |
Total liabilities |
1,642.5 |
2,207.2 |
2,428.7 |
2,317.7 |
2,567.5 |
Net assets |
249.1 |
237.1 |
254.1 |
265.6 |
290.9 |
Minorities |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Shareholders' equity |
249.1 |
237.1 |
254.1 |
265.6 |
290.9 |
Reconciliation of movement in equity |
|||||
Opening shareholders' equity |
236.0 |
249.1 |
237.1 |
254.1 |
265.6 |
Profit in period |
23.8 |
28.1 |
31.1 |
10.2 |
25.3 |
Other comprehensive income |
2.9 |
(25.8) |
0.0 |
0.0 |
0.0 |
Ordinary dividends |
(14.0) |
(14.8) |
(15.5) |
0.0 |
0.0 |
Special dividend |
0.0 |
0.0 |
1.2 |
0.0 |
0.0 |
Share based payments |
0.4 |
0.5 |
0.3 |
0.3 |
0.0 |
Issue of shares |
0.0 |
0.0 |
0.0 |
1.0 |
0.0 |
Share issuance costs |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Closing shareholders' equity |
249.1 |
237.1 |
254.1 |
265.6 |
290.9 |
Other selected data and ratios |
|||||
Period end shares in issue (m) |
18.5 |
18.5 |
18.5 |
18.6 |
18.6 |
NAV per share (p) |
1,348 |
1,283 |
1,375 |
1,426 |
1,562 |
Tangible NAV per share (p) |
1,292 |
1,230 |
1,326 |
1,385 |
1,528 |
Return on average equity |
9.8% |
11.6% |
12.7% |
3.9% |
9.1% |
Normalised return on average equity |
8.9% |
12.3% |
13.4% |
3.9% |
9.1% |
Return on average TNAV |
9.3% |
13.3% |
14.6% |
4.3% |
10.3% |
Average loans |
1,484.6 |
1,826.4 |
2,258.9 |
2,389.0 |
2,382.5 |
Average deposits |
1,321.7 |
1,655.4 |
1,967.8 |
2,010.3 |
2,005.8 |
Loans/deposits |
107.8% |
109.8% |
121.3% |
116.0% |
115.0% |
Risk exposure |
1,446.1 |
1,824.6 |
2,118.1 |
2,064.4 |
2,285.0 |
Common equity tier 1 ratio |
16.5% |
13.8% |
12.7% |
13.9% |
13.4% |
Source: Company accounts, Edison Investment Research
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