The FY18 results provide evidence that Secure Trust Bank’s (STB’s) strategy of combining de-risking and selective growth is working. Adjusted EPS rose 39% y-o-y while loan growth was a robust 27%; ROE increased from 8.9% to 13.1%. STB targets further strong growth in 2019 and is investing in areas such as a new motor finance platform, treasury and risk management to underpin this. STB has entered 2019 with good momentum, healthy capital and proven flexibility to adapt to opportunities and challenges that may occur in the macro and political environment.
STB’s adjusted 2018 EPS rose 39% to 162p (our forecast: 154.8p). Pre-tax earnings rose similarly. The bank has succeeded in offsetting the tighter interest margins inherent in a lower-risk asset mix with a lower rate of impairments. The strong earnings growth has been effectively delivered with a lower risk profile. Overall loan growth was 26.9%, with similar increases in the retail and commercial divisions. Motor finance growth was only 1% y-o-y, but the bank has been changing the business to near-prime/prime and having stopped writing subprime is looking for strong growth here in 2020 and beyond.
STB has started the year with good momentum and sees the potential for further significant expansion in its chosen areas. There is capital headroom (CET1 13.8%) to accommodate this growth (we forecast loan growth of 20% in 2019). We expect loan growth across in all key areas in 2019, supported by investment in systems and people. We look for EPS growth of 13% in 2019, with some drag from rising costs reflecting investment to support longer-term growth. On a three-year view we see operating and financial leverage combining to allow the ROE to climb to over 18% by 2021 and three-year CAGR EPS growth of 15%. Aside from organic growth, the bank continues to review possible acquisitions with a disciplined application of price and business fit criteria,
We have made minor changes to our EPS estimates (-4.2% for 2019, +0.2% 2020) driven by operating costs and investments. This moves our dividend discount model (DDM) valuation down marginally from 2,443p to 2,428p. The bank trades on a 2019 PNAV of 1.0x yet its forecast returns on equity are well above our assumed cost of equity (10%). Our DDM fair value is equivalent to a 2019 PNAV of 1.8x.