Secure Trust Bank’s (STB) first half results were a reminder that the reshaping of the loan book towards one with a lower risk profile does involve some pain. While lower asset yields from new business and maintained impairments from the back book pinch near-term returns, the potential growth of over 30% in FY18 and FY19 earnings is an indicator of gains to come on the back of a higher-quality, more diverse and resilient loan book.
STB reported continued strong growth of over 30% in its loan book compared with the same period last year, taking the total to £1.5bn. The adoption of a more riskaverse lending positioning, including the withdrawal from higher-risk unsecured lending and sub-prime motor finance, has trimmed interest yields from 11.7% for H116 to 10.1%. This and an increase in impairments, partly reflecting performance of sub-prime motor loans, resulted in a 10% reduction in underlying pre-tax profits compared with the prior year period. However, the loan book is now positioned to be more resilient in the face of a potential worsening of credit conditions and the capital position remains strong (CET1 15.3%) to exploit organic and inorganic opportunities.
Following the sale of Everyday Loans Group for a profit of over £100m last year, STB has had significant excess capital to deploy in the development of the business, even after payment of a special dividend. In this situation a risk for shareholders would be that management is insufficiently disciplined in applying the capital. In contrast, STB has stuck with its cautious view of credit risk, continuing to improve the quality of its loan book and has reviewed quite a large number of acquisition opportunities but held back from a deal as so far none has fully met its criteria.
To allow for the near-term profile of profitability we have focused on the output of our dividend discount valuation, which gives a value of c 2,300p (versus previous ROE/COE-derived valuation of 2,480p) and would imply a prospective P/E of 13.2x (FY18e) and a P/NAV of 1.8x, which seem reasonable given the potential further growth as STB deploys capital and realises the benefits of the changes in the make-up of its loan book.