Secure Trust Bank (STB) reported results that were close to expectations for 2016, a year that saw major changes as the group generated substantial profit from the Everyday Loans Group sale, gained independence and moved to the Main Market. At the same time there was substantial growth in the loan book contributing to underlying EPS growth of 20%. Looking ahead, there is scope for further organic growth but STB will also consider acquisitions on a disciplined basis. Both have the potential to contribute to a strengthening in the return on equity from the 2016 level of 11.9%, towards the return on required equity of nearly 20%.
STB’s full year results were close to our expectations in terms of loan growth (+38%), operating income (+28%), loan impairments (+65%) and underlying net income (+21%). During the year the sale of Everyday Loans Group (ELG) was completed realising a net profit of £116.8m, which made a significant contribution to the increase in NAV per share from 776p to 1,179p, after payment of the special dividend of 165p following the transaction. Investment has been made in the development of the new mortgage product launched in March this year, further broadening the product range, and in the savings platform that will allow a wider offering on the liability side of the balance sheet, including an ISA later this year.
STB is taking a cautious approach in several areas having withdrawn from new unsecured personal lending and tempered its appetite for lending in real estate and asset finance where the returns on offer are unappealing compared with the risks. Fortunately, the diversity of the loan book still provides a number of avenues for organic growth including residential mortgages which STB sees as becoming a third leg for the group alongside consumer and business lending over the long term. Acquisitions could accelerate growth and improvement in returns, while pricing/risk discipline may point the group to smaller partial purchases rather than a more headline grabbing ‘whole bank’ transaction with all the risks that could bring. Our EPS for FY17e are trimmed by c 8% but increased by 4% for FY18e (page 9).
We have maintained our assumed ROE at 15.5% in our ROE/COE valuation (page 11) giving a value of 2,480p (2,700p previously). The current price suggests an ROE assumption of 13.3% which appears cautious given STB’s record and positioning.
