Secure Trust Bank (STB) remains on track with both its shift towards a lower risk loan book and near-term trading. The move to lower risk assets has trimmed returns, but loan book growth continues apace and the benefits in terms of revenue and impairments should become clear in FY18 and FY19, years in which we expect earnings growth of over 30%.
STB reported that Q4 trading was in line with management expectations and that FY17 results are likely to be similar to market estimates. The bank has continued the strategic repositioning of its loan book to a lower-risk profile through a move away from unsecured consumer, subprime motor and large prime central London housebuilding lending. As previously announced, the exit from unsecured personal lending was completed in December with the sale of the remaining portfolio, generating a profit of c £0.5m and net proceeds of c £36.6m. The level of impairments is not mentioned, indicating a stable situation ahead of the expected improvement as the benefits of the changes in the book flow through from FY18. Growth in the Retail, Motor, Mortgage and SME lending balances has continued in a controlled (but still brisk) manner.
While STB takes a cautious view on the balance of risk and reward prevailing in parts of the market, it continues to find attractive opportunities to grow its retail, motor, mortgage and SME (including real estate and invoice financing) loan books. Reflecting STB’s size, surplus capital and its ability to address parts of the market outside the focus of the large banks, our estimates assume loan book growth of more than 20% per annum between 2017 and 2019. M&A remains under consideration, with one option being a book acquisition to accelerate the scaling up of the mortgage business employing the personnel and systems already in place.
We have not changed our estimates so, on the same assumptions, our dividend discount model gives an unchanged value of c 2,300p, which would imply an FY18e P/E of 13.2x and a P/NAV of 1.8x. This does not appear stretched in view of the potential for further growth and improving returns as STB employs its surplus capital while realising the benefits from the reshaping of its loan book.