The most eye-catching figure was impairments dropping to 468bp from 871bp in H217; the biggest improvement was the motor finance as the bank moves away from subprime segment. Loan growth was strong in commercial finance and retail point of sale lending where margins remain good, whereas the bank held back in the nascent mortgage business due to prices. Meanwhile, the run-off in the asset finance book was greater than expected. ROTE was 12.3%, up from 10.3% a year ago. Capital headroom remains ample (CET1 13.6%) for the planned growth.

STB sees significant opportunities in both its repositioned motor finance segment and its business segment. However, management seems keen to avoid missteps in these competitive markets and wants to proceed cautiously. Our numbers reflect this, but we still see scope for the bank to roughly double its assets and earnings between 2017 and 2020, while keeping CET1 above 10% and maintaining a generous dividend policy. Management will look at M&A opportunities (particularly in asset finance, mortgages and consumer finance) should they arise. We believe STB would redirect its loan book growth if a portfolio does not deliver the profitable growth opportunities it seeks.

Although we have cut our earnings estimates by 3–5%, dividends have been left unchanged. Our dividend discount model (DDM)-derived fair value is the same at 2,350p. The shares have underperformed peers during the past 12 months and now stand at a 15–20% 2018–19e P/E discount to peers even though its profits are currently depressed due to the transition and the undeployed capital. At our fair price, STB would be trading at a P/NAV of 1.7x, which seems plausible for a bank that we expect to achieve an ROTE of 18% by 2020.