Secure Trust Bank’s (STB) pre-close trading update indicates that FY19 results should be in line with expectations, despite the economic slowdown dampening loan demand in the second half of 2019. STB highlighted its strong control over risk while interest margins have been stable. The bank is cautiously optimistic about 2020 and is well positioned, with healthy capital, good liquidity and new business pipelines. STB does not envisage material changes to 2020 guidance, and we are maintaining our estimates and 2,428p per share valuation.
We believe that STB’s cautious lending stance and business repositioning has helped it deliver solid 2019 numbers (we forecast 2019 pre-tax earnings +16% year-on-year, ROTE of 14.8%) and it is well positioned to adjust if business picks up following the UK general election. The positive tone regarding risk control is reassuring given that the economy was sluggish during the second half of the year. The bank has indicated that impairment rates are running lower than at mid-2019.
We continue to forecast 17% and 14% growth in loans for STB in 2020 and 2021, respectively. This should help drive underlying pre-tax earnings from the forecast £42.1m in 2019 to £60.8m in 2021. There are still some question marks regarding the UK economy in the short and medium term but, if the economic backdrop is supportive, STB should conceivably be able to deliver on these forecasts
We make no changes to our forecasts and maintain our fair value at 2,428p per share (based on a dividend discount model), equivalent to a 2020 P/NTA of 1.6x. The bank’s shares are up 33% over the last 12 months, but our fair value estimate is still 51% above the current share price, offering attractive upside potential. The dividend yield of 5.7% (2020e) is above the average of STB’s peers.