The Q4 trading update confirmed the business has been performing in line with management expectations and the full-year results should meet market expectations. Secure Trust Bank’s (STB’s) prudent approach was reflected in the announcement of greater caution in its consumer business including suspension of new unsecured personal lending. We have tempered our estimates for FY17 and FY18 but our updated valuation still shows a c 16% premium to the share price.
Reflecting its emphasis on growing prudently and profitably rather than prioritising scale, STB has tightened underwriting standards and increased prices in consumer and SME finance, and has stopped originating unsecured personal loans (UPLs). These steps have been taken to mitigate the potential for higher impairment rates in the event of an economic deterioration, including higher unemployment and inflation. Despite the current uncertain economic outlook, other market participants are offering unsecured personal loans at record low interest rates, which STB believes cannot be sustained.
As STB reported previously, competition in the motor finance sector has decreased as some of the more aggressive participants have pulled back and in one case withdrawn entirely. This should help maintain sustainable growth in this area. In mortgages, STB plans to go ahead with its product launch rather than wait for the postponed announcement of capital regimes by the Basel Committee. Larger incumbents have very low appetites for risk in the mortgage sector, so there is room for selective and disciplined challengers to earn attractive risk-adjusted returns. The launch will be modest initially allowing STB to fine tune its offering before making more significant capital commitments.
We have maintained our FY16 estimates but used more cautious assumptions for FY17 and FY18 resulting in EPS estimates c 21% below our previous numbers. While we expect longer-term returns to strengthen, for consistency we base our ROE/COE valuation on our FY18e ROE (c 15%), which gives a fair value of 2,700p (formerly 3,400p), around 16% above the current share price.
