Secure Trust Bank is an established ‘challenger’ with a record of organic profitable growth. The Everyday Loans Group sale provides substantial regulatory capital for organic and potentially inorganic growth. The move into mortgages will further diversify lending. Despite a record of rapid loan book expansion, an ROE/COE valuation model suggests the market is reluctant to make full allowance for profitable employment of the surplus.
Secure Trust Bank (STB) has continued the strong pace of growth in the loan book seen in recent years with continuing activities (excluding Everyday Loans Group, ELG) ahead 82% in 2015 and five-year compound growth of 64%. Revenue and profit before tax were up 39% and 40% respectively. Growth in the loan book meant that the common equity tier 1 ratio declined from 18.7% to 13.6%. Adjusting for the ELG sale and the proposed 165p special dividend, the ratio would have been 18.4%, providing scope for substantial further loan growth to replace ELG’s profit and more. The ordinary dividend was increased by 6% to 72p.
Prospectively, the major theme remains the opportunity for STB to continue to grow its loan book rapidly and profitably at a time when the major incumbent banks remain focused on managing capital and core business. There appears to be good potential to expand in STB’s existing lines of business and the mortgage business, which is in the process of being launched, could in due course provide a third leg for the group alongside consumer and commercial lending. There are macro risks associated with reduced economic growth expectations and the outcome of the EU membership referendum, but in relative terms STB does not appear particularly sensitive to this and could conceivably use its capital opportunistically were there to be a period of market volatility.
Comparing STB with a range of challenger banks and specialist lenders places it at the upper end of the range in terms of P/E and price to NAV ratios, but it also has a relatively high ROE (before the temporary depressive effect of the ELG sale). It looks fairly valued when plotting ROE versus P/NAV or within an ROE/COE model that only assumes an ROE of 16% but, factoring in a return of 19%, which is more consistent with deployment of surplus capital, points to a value of about 3,600p or 26% above the current share price.