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Research: Financials
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.
Secure Trust Bank |
Revised forecasts reflect macro concerns |
Forecasts update |
Banks |
17 January 2023 |
Share price performance
Business description
Next events
Analysts
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 |
PBT* |
EPS* |
DPS |
P/E |
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 |
Market cap |
P/E (x) |
P/E (x) |
Dividend yield (%) |
ROE (%) |
ROE (%) |
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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Research: Healthcare
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