Secure Trust Bank (STB) is delaying the release of its FY19 results, due on 26 March, as requested by the FCA on account of COVID-19. It was aiming for double-digit earnings growth in 2020 and stated that its first two months of trading was strong and ahead of management expectations. COVID-19 uncertainty has nevertheless prompted STB to cancel its forward guidance and final 2019 dividend payment. We are maintaining our FY19 forecasts as the pre-close statement indicated that results would be in line with expectations. However, we are suspending our 2020â21 forecasts until there is more clarity on the impact of COVID-19. Our DDM fair value of 2,428p per share is equivalent to a P/NAV of 1.8x in 2019. This valuation reflected assumptions that STB would deliver returns considerably above its 10% cost of equity (COE) in the medium and long term.
Banks are inevitably at the front line of companies feeling the impact of the dramatic slowdown in economic activity from the measures introduced to control the spread of COVID-19. STB is unlikely to be an exception. So far, it has felt the impact in reduced demand in retail and motor finance. The inevitable rise in unemployment is likely to result in higher asset quality impairments than previously forecast. At this stage, it is difficult to predict how the disease will develop, the length of the crisis, the success of government efforts to shore up the economy, or the speed and strength of recovery
STB’s pre-close FY19 statement was relatively upbeat, with results in line with expectations despite the economic slowdown in the second half of 2019. STB highlighted its strong control over risk and that interest margins have been stable. Its cautious optimism for 2020 was underpinned by healthy capital, good liquidity and new business pipelines. Its proven flexibility in adapting to opportunities and challenges will now be tested as it seeks to minimise the operational and economic impact of COVID-19.
We note the Bank of England has taken some measures to limit the upward pressure on impairments. These include (1) allowing companies that participate in government schemes to alleviate COVID-19 impact (such as payment holidays) not to automatically have their loans move into stage 2 or stage 3 and (2) banks can differentiate COVID-19 related breach of loan covenants that might be temporary from normal beaches of covenants.
Our forecasts and fair value are under review while we ascertain the impact of COVID-19 and await further guidance from management on the trading conditions and actions it is taking to mitigate the impact.