Shareholders in Arbuthnot Banking Group (ARBB) have approved the sale of shares in Secure Trust Bank (STB) that will leave the former parent as a sub-20% shareholder in the group. STB already has significant capital headroom to accommodate strong organic loan growth following the sale of Everyday Loans Group. Its plan to seek a Main Market listing will enable it to appeal to a broader investor audience, leaving it better placed to consider share issuance, providing greater flexibility to pursue a wider range of strategic options. This comes at a time of rapid growth and proliferation of contenders among specialist lenders and challenger banks.
Secure Trust Bank has recorded growth in customer loans and earnings per share of over 40% pa compound between 2011 and 2015 reflecting successful development of its specialist retail and commercial lending businesses against a favourable background in which the large banks’ attention is focused on core businesses and strengthening capital positions. While challengers and specialist lenders have generally seen strong growth, like STB, they still account for only a small part of the market. The emergence of a range of contenders, each with their own market and shareholder profile, creates a dynamic market and there should be opportunities for valuable scale efficiencies for a player that can successfully consolidate.
The reduction of ARBB’s stake to below 20% and the planned move to the Main Market appears well timed, freeing STB to consider additional strategic options that may require equity issuance. While rapid growth and acquisitions carry risk, STB’s long history and the experience of its management team are positive indicators that organic growth will continue to be carefully managed and any acquisition candidate assessed in a balanced way.
We have not changed our earnings estimates or our ROE/COE-based valuation estimate of 3,600p. Using the same model the current share price implies a sustainable return on equity of below 15%, broadly consistent with our estimate for the current year, but markedly below subsequent years as surplus capital is employed.