Secure Trust Bank’s (STB’s) trading update for Q319 had a reassuring tone. The business trends and ‘overall results are in line with management expectations’. Management noted that demand slowed in September, but this is not a surprise given Brexit deadline concerns. STB has been in de-risking mode for several quarters and has been repositioning its loan book in anticipation of economic and political uncertainties. At the same time, the short duration of its loan book allows it to respond quickly as the lending environment changes. We are not making changes to forecasts or our fair value of 2,428p per share.
The Brexit uncertainty has led to some borrowers holding back ahead of the 31 October deadline. This has been mainly in the real estate finance division (representing 29% of STB’s H119 lending revenue net of impairments). STB warned that political developments could have an impact on the economy and STB’s Q419 results. However, this slowdown could lead to a pronounced catch-up in activity after the Brexit outcome becomes clearer. Retail demand has been little affected, as unemployment remains low and wage growth is good.
The Financial Conduct Authority (FCA) announced on 15 October it was planning to ban some commission arrangements between lenders and some car retailers and motor finance brokers. These are commissions that are linked to the interest rate the customer pays that the broker has the power to set or adjust. STB does not expect any negative impact from these proposed changes as it has never employed any of these commission structures across its business.
We are not changing our forecasts but are reassured by the update. We are expecting a normalised return on equity of 14.4% in 2019 and see this reaching 18.7% by 2021. Our dividend discount model-derived fair value remains 2,428p implying a 2019 P/NAV of 1.8x. We forecast STB to continue to deliver returns considerably above its 10% cost of equity. As such, a significant premium to the current P/BV of 1.0x seems justified. STB is paying an attractive current year dividend yield of 6.6%, which is set to grow.