Secure Trust Bank’s (STB) FY19 figures were good, as already flagged in its trading update. Underlying ROE was 14.0% (FY18: 12.8%), EPS was up 10% y o y and capital remained comfortable (CET1 12.7%). However, the COVID-19 pandemic has led to a significant drop in business activity and impairments are expected to increase. STB has suspended forward guidance since March due to uncertainty relating to the pandemic and subsequent economic recovery. Its relatively short duration loan book, already cautious lending stance and good capital position should help. Financial markets turmoil has the bank trading on a 2019 P/BV of 0.65x despite a track record of delivering value creating ROE above its COE.
The key message during FY19 from STB was cautious optimism. It was growing its balance sheet at a fast pace (loans grew 20% in 2019), and at the same time it was de-risking the loan profile. Management were concerned about the economic slowdown, the impact of Brexit as well as the lending rates in some segments such as consumer mortgages. STB was able to deliver a robust return on equity (ROE) of 14% in 2019 with credit risk under control, while investing in areas such as motor finance and commercial finance for future growth.
STB’s relatively short loan book duration allows it to de-risk quicker and protect capital and maintain liquidity. But impairments will inevitably rise and loan book shrinkage also adversely affects results. STB currently is seeing no new motor finance lending (car dealers and brokers are closed), while retail finance is at 50% of normal levels. The bank now is focused on managing the risks and supporting clients. Management believes merger and acquisition opportunities may exist as the economy emerges from the crisis. Operationally speaking, the bank can increase lending fairly quickly as the economy improves. The key challenge will be assessing the new lending conditions and risk parameters in the recovery phase.
Banks are highly cyclical stocks and often heavily discounted during recessions or periods of heightened uncertainty. STB shares have fallen 41% in last three months and are on a 2019 P/BV multiple of 0.65x. Earnings should be sharply down in 2020; 2021 also will be affected. But STB has a good long-term track record of returns above its cost of equity (COE), a robust balance sheet and a cautious and nimble approach to lending. As market sentiment calms down and clarity improves, fundamentals should come to the fore, which could clearly suggest a valuation well above book value. Our forecasts and valuation remain under review.
