Secure Trust Bank’s (STB) trading update seems to vindicate its decision to step away from mortgages for now and focus on segments where the risk-reward pricing is more attractive. The retail and motor finance segments (both with net revenue margins above 10%) have been doing well and earnings are slightly ahead of management expectations in the first four months of this year. We are not changing our forecasts, but may revise them if interims in July confirm the good news.
The retail and motor finance segments have the highest net revenue margins (after impairments) in STB’s portfolio. The trading update indicates that these two areas are growing well and boosting earnings. STB’s decision to stand back temporarily from mortgage lending was a bold one, since mortgages had been slated as one of the legs for growth in the bank. However, management felt that as competition increased in the mortgage segment, what was intended as a defensive segment was becoming more problematic. Lower margins not only mean lower profitability, but also increase operational gearing and earnings risk. STB has not changed its risk appetite (it remains wary of the macro outlook), but seems to be finding riskadjusted margins in selected, unsecured segments more profitable.
STB’s balance sheet comments were very positive. Credit quality trends are stable, while capital and funding positions remain strong. This balance sheet strength has helped STB gain business so far this year at the expense of some non-bank lending competitors that have struggled with funding, in some cases even ceasing new business. The company believes the continued unwinding of the Funding for Lending and Term Funding schemes may lead to more non-bank lenders facing similar problems, to STB’s advantage.
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 2019 P/NTA of 1.9x. STB’s shares are up 22% ytd, but the bank’s P/NTA is still trading at only 1.1x. We believe that if STB continues to perform well in the next two months, the interim results in July should reflect this and we may revise our numbers.