Secure Trust Bank (STB) reported H120 PBT of £5.1m (vs £18.1m a year ago) and a 3.0% ROE. Income grew 4% y-o-y, but impairments almost doubled, and payment holiday charges also hurt. STB notes that since the lockdown ended, business has been rebounding. Its robust capital (CET 13.5%), business model and proven agility allow it to react to the changing lending environment. STB currently trades on a P/BV of 0.49x, reflecting sentiment more than fundamentals given its profitability track record and successful model. Our fair value estimate is 1,704p per share, down from 2,428p..
STB’s cautious stance coming into the crisis helped mitigate lockdown damage, as did early de-risking in Consumer Finance and cost-cutting measures. Furthermore, STB’s biggest portfolio, Real Estate Finance (c 40% of loan book), continued to grow strongly with good asset quality. Cutting back on risk and IFSR 9 capital relief measures on impairments helped STB boost capital while maintaining good liquidity.
IFRS 9 required banks to take a view regarding the asset quality over their entire life to encourage upfront provisioning. However, there is still much uncertainty in the depth of the recession, and the timing and shape of the economic recovery. Payment holidays and the ending of the UK government furlough scheme add to this uncertainty. At the same time, STB is seeing good pick-up in business, including Commercial Finance and Retail Finance.
Although STB maintains its no formal guidance stance, we have reinstated forecasts, with a range of assumptions based on the premise of an economic rebound in 2021 without another nationwide lockdown. On these assumptions, we expect STB’s profitability to remain relatively low in 2020 (estimated reported ROE 2.0%) and to start normalising in 2021 (ROE of 9.2%). Pre-COVID-19, we forecast ROE of 15% and 18%, respectively.
We obtain our fair value (FV) of 1,704p per share (pre-crisis 2,428p, 15 January 2020) using a net asset value approach. We continue to assume a sustainable ROE of 13.5%, 10% in COE and 2% annual growth. We assume no value creation or dividends in 2020/21 (although we believe a dividend is likely to be paid in 2021) and the FV is the present value of the (ROE-g)/(COE-g) formula at end of 2022. The 1,704p value implies an FY20e P/BV of 1.2x; STB is trading at 0.49x.