FY17 was a further year of change for Secure Trust Bank (STB) as management completed the shift away from unsecured consumer loans and reduced the risk profile in motor finance. This restricted near-term profits but the pace of loan book growth has remained strong and looks set to feed into substantial earnings growth as the cost of risk subsides, more than offsetting the lower returns earned on lower risk lending. The shares have begun to respond to this prospect following the results, but the valuation suggests further upside.
STB reported loan book growth of 27% to £1.6bn (ex-discontinued) with the largest increases being in real estate and retail point-of-sale lending. The bank has repositioned its balance sheet away from higher-risk lending, including unsecured consumer and sub-prime motor loans. Impairments were increased by provisions against the remaining sub-prime book and this, together with investment in new products and regulatory compliance, acted as a drag on 2017 profit, but even so, underlying, continuing profit was stable at £27.0m vs £27.3m. Capital ratios including the CET1 at 16.5% provide headroom for further growth in the loan book.
The economic background remains benign and STB has withdrawn from the higher risk areas of consumer finance where there could be stress and where regulators have raised warning flags. STB sees good potential for profitable growth in business, retail, motor and consumer mortgage lending. The new deposit platform completed in 2017 will help support this growth, providing greater flexibility and containing funding costs. New management has been brought into motor finance tasked with developing in the prime and near-prime segments. Following the period of adjustment in 2017, STB appears well placed to generate attractive earnings growth.
Updating our DDM calculation for our new estimates (now including 2020 – see changes on page 6) gives a fair value of c 2,350p compared with c 2,300p previously. A price of 2,350p would imply a prospective P/E for FY18 and FY19 of 14.6x and 11.6x, respectively, which seems plausible for a specialist bank with a conservative risk appetite but positioned for strong growth.