Secure Trust Bank (STB) reported H119 adjusted pre-tax earnings up 14% y o y driven by volume growth and lower impairment rates. With a diversified lending model it has shown the ability to shift asset allocation significantly, de-risking and avoiding price pressures prevailing in some lending asset classes. By putting the brakes on early, STB is now reaping the rewards, with good profitability and the flexibility to adjust to macro and political changes.
Although cautious on the macro and political environment, STB has pressed ahead in the segments where the price-risk proposition remained attractive. The loan book grew 24% y-o-y; retail point of sale (+32% y-o-y) and real estate business lending (still biased towards investment lending and with average LTV of 58%) were the main highlights. STB has completed the first stage of the transformation of its motor lending business and its auction stock lending platform is now live. The de-risking has compressed margins as expected (NIM fell from 7.3% a year ago to 6.5%) but this was offset by lower impairment charge rates and volume growth. The bank reported an adjusted £18.8m in pre-tax profits and an ROE of 12.8%. STB seems to be on track to meet our FY19 forecasts of PBT of £42m and ROE of 14.4%.
Although STB has used some of its capital for this growth, its CET1 of 12.8% still shows good headroom for a continued robust expansion rate. Liquidity remains good (loan to deposit ratio of 114bp) and we note that the launch of new cash ISA products in April was a success. The loan book duration is now only 1.9 years and this contributes to STB’s ability to profitably respond to changes in the macro and political outlook, particularly with Brexit looming ahead.
We have not made changes to our forecasts or our DDM-derived fair value (2,428p per share). We forecast STB to continue to deliver returns considerably above its 10% COE. We see ROE reaching 18.7% by 2021. As such, a significant premium to the current trading P/BV of 1.0x seems justified in our opinion. Our DDM fair value is equivalent to a 2019 P/NAV of 1.8x. STB is paying an attractive current year dividend yield of 6.6%, which is set to continue to grow.