Buy into Secure Trust's disciplined growth

Secure Trust's largest business is real estate finance, which lends almost exclusively for professional residential property investment and development. During the first half of 2016 this business grew its loan book by a third on the previous year to £362m. This was despite management adopting a more cautious approach prior to the referendum, limiting loans to residential housebuilders to no more than 60 per cent of the gross development value and 50 per cent in central London. What's more, the lender had no exposure to buy-to-let and just £31m in loans to the commercial property sector at that time. The rationale is that during the last cyclical downturn commercial property prices fluctuated more severely than prices in the residential sector. It also put its entrance to the residential mortgage market on hold following the referendum.

In line with this more cautious approach, Secure Trust has reduced its exposure to increasingly competitive unsecured personal lending. Citing concerns over the reduction in interest rates being offered on unsecured personal loans in an increasingly crowded market, as well as levels of personal debt, management announced it would cease writing new unsecured loans in January. Its exposure to consumer finance had already been significantly reduced after it sold branch-based sub-prime lender Everyday Loans to Non-Standard Finance (NSF) in 2016. While the sale has boosted capital and the money will take some time to deploy, management expects to have generated an underlying return on "required" equity in excess of 30 per cent during 2016, the 10th successive year it has done so. The £108m in proceeds also repaid intercompany debt relating to its unsecured personal loans. At the end of June the group had a core tier one capital ratio of 20.1 per cent, at the top end of the sector.

Analysts at Shore Capital expect higher investment costs during 2017 as the bank invests in its own operations, as well as additional expenses linked with its recent move to the FTSE 250 from the Alternative Investment Market. However, with the loan book growing at a solid pace - it grew by half to £1.1bn during the first half of the year - we reckon income will quickly outpace any rise in costs.