Secure Trust Bank — Revised forecasts reflect macro concerns

Secure Trust Bank (LSE: STB)

Currency in GBP

Last close As at 26/01/2023

GBP7.06

−10.00 (−1.40%)

Market capitalisation

GBP134m

Research: Financials

Secure Trust Bank — Revised forecasts reflect macro concerns

We are adjusting our forecasts for Secure Trust Bank (STB) to better reflect the deteriorating economic outlook in the UK. We have raised our FY22 forecast for PBT from continuing operations by 1%, but reduce it by 15% in FY23. Lower loan growth in 2023 is the key driver; we now estimate growth of 13% in FY22 and 7% in FY23. The impairment charge rate for FY23 has been upped from 1.3% to 1.4%. We have also raised our run-off cost estimates in discontinued operations by £2.6m and £2.0m for FY22 and FY23. Despite our lower FY23 forecasts, the estimated ROE of 9% in both years shows strong business resilience given the cyclical nature of the banking sector. We have maintained a dividend payout ratio of 25% in line with to company policy. STB’s capital position remains comfortable with a CET1 ratio of 14.2% in FY22 and 13.7% in FY23.

Pedro Fonseca

Written by

Pedro Fonseca

Analyst, Financials

Secure-Trust-Bank_resized

Financials

Secure Trust Bank

Revised forecasts reflect macro concerns

Forecasts update

Banks

17 January 2023

Price

724p

Market cap

£135m

Net debt/cash (£m)

N/M

Shares in issue

18.7m

Free float

84.5%

Code

STB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

13.5

6.2

(47.4)

Rel (local)

5.8

(7.7)

(48.0)

52-week high/low

1,383p

624p

Business description

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

Next events

Post-close update

January 2023

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

We are adjusting our forecasts for Secure Trust Bank (STB) to better reflect the deteriorating economic outlook in the UK. We have raised our FY22 forecast for PBT from continuing operations by 1%, but reduce it by 15% in FY23. Lower loan growth in 2023 is the key driver; we now estimate growth of 13% in FY22 and 7% in FY23. The impairment charge rate for FY23 has been upped from 1.3% to 1.4%. We have also raised our run-off cost estimates in discontinued operations by £2.6m and £2.0m for FY22 and FY23. Despite our lower FY23 forecasts, the estimated ROE of 9% in both years shows strong business resilience given the cyclical nature of the banking sector. We have maintained a dividend payout ratio of 25% in line with to company policy. STB’s capital position remains comfortable with a CET1 ratio of 14.2% in FY22 and 13.7% in FY23.

Year end

Operating
income (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

166.1

19.1

81.0

44.0

8.9

6.1

12/21

164.5

58.8

254.0

61.1

2.9

8.4

12/22e

168.0

37.4

145.5

41.6

5.0

5.7

12/23e

184.6

41.6

164.2

40.4

4.4

5.6

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

Tightening credit criteria against a slowing economy

The latest UK Treasury market consensus in December 2022 was for a 0.7% contraction in GDP in 2023, which compares to the expectation of a 0.5% expansion in August. The relatively short duration of STB’s loan book supports its ability to react nimbly to changes in the lending environment and we note that the bank previously disclosed that it was tightening its credit criteria. The most significant cuts to our FY23 estimates are in commercial real estate (year-on-year loan growth cut from 8% to 1%) and retail finance (from 14% to 8%). We currently forecast operating income growth of 2% (previously 6%) in FY22 and 10% (12%) in FY23, which, with STB’s strong track record of cost control, allows the estimated cost to income ratio to drop from 63% in FY21 to 54% in FY23.

Asset quality is key

Against the backdrop of economic uncertainty and slowdown, loan impairments are a key risk to bank earnings. We take some comfort from the fact that loan quality has been resilient, and STB has taken measures to adjust its risk appetite in a short-duration loan book. The risk is centred in the consumer finance division, which also has the widest interest margins. A 10% increase in our loan impairment charge for FY23 would cut our underlying PBT forecast by 10%.

Valuation: Fair value of 2,407p per share

Although we reduced our fair value estimate in our previous note, we now maintain it at 2,407p, despite heightened macroeconomic risks. However, the balance of risks to our fair value is on the downside. We obtain our fair value using a net asset value (NAV) approach with a sustainable return on equity (ROE) of 13.0%, a 10% cost of equity (COE) and 2% annual growth. The fair value is the present value of the (ROE-g)/(COE-g) formula at end 2022 discounted to FY22.

A slower 2023

Adjustments to loan forecasts

We believe it is easier for a small bank like STB with a healthy amount of capital to grow at double-digit levels than larger competitors, even during a recession. However, we think it prudent to reduce our loan growth assumptions for FY22 and FY23 as recession risks loom larger and as management has already tightened its lending criteria. The more significant change to our loan balance estimates has been for FY23. FY23 total group loan balances are now 7% below our previous estimates, with the business finance and consumer finance segments 10% and 4% lower, respectively.

Our current forecasts are for 13% and 7% y-o-y growth in total loans in FY22 and FY23, respectively. If we exclude DMS in the year-on-year comparison, loan balance growth is 17% in FY22e.

Exhibit 1: Loan book balance estimates

£m unless stated

2019

2020

2021

2022e

2023e

Real estate finance

962

1,052

1,110

1,130

1,140

Asset finance

28

10

0

0

0

Commercial finance

252

231

313

350

392

Business finance

1,242

1,293

1,423

1,480

1,532

Motor finance

324

244

263

370

443

Retail finance

689

658

765

1,010

1,095

Debt management service (DMS)

82

82

80

0

0

Retail mortgages

106

78

0

0

0

Consumer finance

1,201

1,062

1,108

1,380

1,538

Other

8

4

0

0

0

Total lending

2,450

2,359

2,531

2,860

3,070

Year-on-year (%)

Real estate finance

25

9

5

2

1

Commercial finance

29

(8)

36

12

12

Motor finance

17

(25)

8

41

20

Retail finance

15

(4)

16

32

8

Total lending growth

21

(4)

7

13

7

Total core lending growth

21

(2)

12

13

7

Source: Secure Trust Bank accounts, Edison Investment Research

Forecasts changes

We have reduced our operating income forecasts by 3% for FY22 and 5% for FY23, mostly driven by changes in loan growth. Lower revenue forecasts are the key factor in the significant reduction in our profit estimates for FY23. The forecast changes in impairments are relatively small; we have increased the impairments charge from 1.3% to 1.4% for both years. We believe that if economic conditions remain challenging, future impairment charges may be materially above our forecasts.

Following company guidance, we have added an additional £2.6m and £2.0m in run-off costs to the discontinued businesses to FY22 and FY23, respectively. Our underlying PBT and EPS include these run-off costs, but this adjustment has no impact on the PBT of continuing operations.

Exhibit 2: FY22 and FY23 forecast changes

Operating income (£m)

Continuing operations PBT (£m)

Reported underlying PBT (£m)

Reported underlying EPS (p)

Old

New

% chg

Old

New

% chg

Old

New

% chg

Old

New

% chg

2022e

173.6

168.0

(3.2)

36.8

37.1

0.8

39.6

37.4

(5.4)

157.3

145.5

(7.5)

2023e

193.6

184.6

(4.6)

50.8

43.1

(15.2)

50.8

41.6

(18.1)

203.2

164.2

(19.2)

Source: Edison Investment Research

Exhibit 3: Impairments as a percentage of average loans

FY19

FY20e

FY21e

FY22e

FY23e

Real estate finance

0.0%

-0.5%

0.0%

0.0%

-0.2%

Commercial finance

0.0%

-0.5%

-0.1%

-0.1%

0.0%

Motor loans

-4.6%

-7.3%

0.0%

-7.6%

-5.5%

Retail finance

-3.1%

-2.2%

-0.7%

-1.4%

-1.6%

Total loans

-1.5%

-2.1%

-0.2%

-1.4%

-1.4%

Total loans including loan modification losses

-1.5%

-2.4%

-0.5%

-1.4%

-1.4%

Impairments (£m)

(32.6)

(51.3)

(4.5)

(36.9)

(41.5)

Impairments + loan modifications (£m)

(32.6)

(54.4)

(3.0)

(36.2)

(41.5)

Source: Secure Trust Bank accounts, Edison Investment Research

Valuation

We continue to value STB based on a NAV approach, using the (ROE-g)/(COE-g) formula. We assume a sustainable ROE of 13.0%, a 10% COE and a 2% increase in long-term earnings. Our fair value of 2,407p is equivalent to a P/BV multiple of 1.38x, compared to the trading FY22e P/BV of 0.42x, suggesting significant upside in the share price in our fair value.

We maintain the fair value after cutting it in our previous note, when we changed our sustainable ROE assumption from 13.5% to 13.0%. However, given the heightened macroeconomic risk, we believe the balance of risk to our fair value is currently on the downside.

Having said this, we note that STB is still trading considerably below book value despite its track record of value-creating ROEs (ie above the 10% COE) and this, in part, reflects the fact that the market is heavily penalising cyclical stocks like financials at a time of heightened economic concern and uncertainty. We do not envisage any losses at STB that could eat into its book value and capital base.

Exhibit 4: STB valuation (net asset value approach*)

ROE (%)

13.0

COE (%)

10.0

Long-term growth (%)

2.0

Book value/share in FY22e (p)

1,752

Indicated fair value for FY22 per share (p)

2,407

Fair value of P/BV FY22 (x)

1.38

P/BV FY22 (x)

0.42

Source: Edison Investment Research. Note: *(ROE-g)/(COE-g).

Exhibit 5 compares STB’s market multiples with some of its peers. STB is trading at a 20% discount in terms of FY22e P/E (5.1x vs 6.4x); we remove Metrobank from the average because it is loss making. STB’s dividend yield is 105% higher than its peers. Its FY22e ROE is 21% below its peers (8.9% vs 11.2%) but it is trading at a wider FY21 P/BV discount of 53%, which is attractive from a valuation point of view.

We continue to see STB as a well-capitalised bank with a good business model that is still intact, and the FY21 results have shown that management seems to have kept a good control on asset quality. We therefore believe that market multiples suggest room for the share price to recover strongly as it starts to move back to a growth stage and earnings growth is boosted as impairments come down.

Exhibit 5: Challenger/specialist lender comparative table

Price
(p)

Market cap
(£m)

P/E (x)
FY21

P/E (x)
FY22e

Dividend yield (%)

ROE (%)
FY21

ROE (%)
FY22e

P/BV (x) last reported

Secure Trust Bank

740

138.3

2.9

5.1

8.3

16.7

8.9

0.47

Close Brothers

1,124

1690.1

9.9

9.6

5.9

10.3

10.7

1.02

CYBG

196

2697.4

5.9

6.5

0.0

11.2

7.2

0.45

Metrobank

118

203.6

N/A

N/A

0.0

N/A

0.2

0.20

OneSavings Bank

506

2173.0

5.4

5.3

5.1

18.7

19.4

1.12

Paragon

589

1375.0

8.8

8.1

4.9

10.3

0.0

1.02

S&U

2,095

254.6

6.1

2.4

4.3

8.1

18.9

1.41

Average ex-Metrobank

7.2

6.4

4.0

11.7

11.2

1.0

STB versus average ex-Metrobank (%)

(60%)

(20%)

105%

42%

(21%)

(53%)

Source: Refinitiv, Edison Investment Research. Note: Priced at 6 January 2023.

Exhibit 6: Recent share price performance in a peer group context (%)

One month

Three months

One year

Ytd

From 12-month high

Secure Trust Bank

13.8

(3.9)

(44.4)

(1.3)

(47.9)

Close Brothers

6.3

17.0

(21.7)

7.4

(23.7)

Virgin Money

9.9

52.5

7.0

7.7

(10.3)

Metrobank

20.4

49.0

16.6

(2.5)

(8.5)

OneSavings Bank

8.1

16.3

(7.7)

5.4

(16.9)

Paragon

21.1

43.3

3.0

4.5

(4.8)

S&U

(1.2)

(1.2)

(24.1)

0.2

(27.1)

Average

10.8

29.5

(4.5)

3.8

(15.2)

STB versus average

3

(33)

(40)

(5)

(33)

Source: Refinitiv, Edison Investment Research. Note: Priced at 6 January 2023.

Exhibit 7: Financial summary

Year end 31 December

2020

2021

2022e

2023e

£m except where stated

PROFIT AND LOSS

Net interest income

150.9

150.8

151.9

168.5

Net commission income

15.2

13.7

16.1

16.1

Total operating income

166.1

164.5

168.0

184.6

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

(92.6)

(104.0)

(94.2)

(100.1)

Operating profit pre impairments & exceptionals

73.5

60.5

73.8

84.6

Impairment charges on loans

(51.3)

(4.5)

(36.9)

(41.5)

Losses on modification of financial assets

(3.1)

1.5

0.7

0.0

Other income

0.0

(0.1)

0.0

0.0

PBT before non-recurring

19.1

57.4

37.6

43.1

Non-recurring items

0.0

(1.5)

(0.5)

0.0

PBT continuing operations

19.1

55.9

37.1

43.1

Corporation taxes

(3.7)

(10.4)

(8.8)

(9.9)

Tax rate

19.4%

18.6%

23.7%

23.0%

Profit after tax - continuing basis

15.4

45.5

28.3

33.2

PBT - discontinued businesses

0.0

1.4

5.0

(2.0)

Tax on discontinued businesses

0.0

0.0

(1.2)

0.5

Profit after tax - total reported

15.4

46.9

32.1

31.7

Minority interests

0.0

0.0

0.0

0.0

Net attributable income – reported

15.4

46.9

32.1

31.7

PBT - total reported underlying

19.1

58.8

37.4

41.6

Net attributable income underlying

15.4

48.4

28.1

31.7

Average basic number of shares in issue (m)

18.6

18.6

18.7

18.7

Average diluted number of shares in issue (m)

19.0

19.1

19.3

19.3

Reported diluted EPS (p)

81.0

239.4

146.6

171.9

Underlying diluted EPS (p)

81.0

254.0

145.5

164.2

Ordinary DPS (p)

44.0

61.1

41.6

40.4

Special DPS (p)

0.0

0.0

0.0

0.0

Net interest/average loans

6.32%

6.17%

5.63%

5.68%

Impairments incl losses on loan modifications/average loans

2.28%

0.12%

1.39%

1.40%

Cost income ratio

55.7%

63.2%

56.1%

54.2%

BALANCE SHEET

Net customer loans

2,358.9

2,530.6

2,860.0

3,070.0

Other assets

302.3

355.3

390.0

398.9

Total assets

2,661.2

2,885.9

3,250.0

3,468.9

Total customer deposits

1,992.5

2,103.2

2,383.3

2,558.3

Other liabilities

401.1

480.3

540.0

564.2

Total liabilities

2,393.6

2,583.5

2,923.3

3,122.5

Net assets

267.6

302.4

326.7

346.4

Minorities

0.0

0.0

0.0

0.0

Shareholders' equity

267.6

302.4

326.7

346.4

Reconciliation of movement in equity

Opening shareholders' equity

252.0

267.6

302.4

320.9

Equity restatement adjustment

0.0

0.0

0.0

0.0

Profit in period

15.4

45.6

28.3

33.2

Other comprehensive income

(0.2)

0.1

0.0

0.0

Ordinary dividends

0.0

(11.9)

(10.8)

(7.7)

Special dividend

0.0

0.0

0.0

0.0

Share based payments

(0.7)

1.0

1.0

0.0

Issue of shares

1.1

0.0

0.0

0.0

Share issuance costs

0.0

0.0

0.0

0.0

Closing shareholders' equity

267.6

302.4

320.9

346.4

Other selected data and ratios

Period end shares in issue (m)

18.6

18.6

18.7

18.7

NAV per share (p)

1,436

1,622

1,748

1,853

Tangible NAV per share (p)

1,395

1,585

1,715

1,821

Return on average equity (normalised)

5.9%

16.7%

8.9%

9.4%

Return on average TNAV

6.4%

19.1%

10.8%

11.6%

Average loans

2,389.0

2,444.8

2,695.3

2,965.0

Average deposits

2,010.3

2,002.8

2,243.3

2,470.8

Loans/deposits

118.4%

120.3%

120.0%

120.0%

Risk exposure

1,999.7

2,087.4

2,253.1

2,428.1

Common equity tier 1 ratio

14.0%

14.5%

14.2%

13.7%

Source: Secure Trust Bank, Edison Investment Research


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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

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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