Brexit-induced anxiety has placed Secure Trust Bank’s (STB) shares – like those of its peers – under considerable pressure during the past 12 months, but the extent of that de-rating looks overdone. The alternative lender’s prudent approach to writing new business and high regulatory capital levels – which means it has one of the lowest leverage ratios in the sector – make it better placed than many of its peers to withstand a slowdown in UK economic growth. What’s more, the shares offer a potential dividend yield of 7.4 per cent in 2019, which is forecast to be covered more than twice by adjusted earnings.
Well-covered dividend
Shares' historical discount
Impairment rate improving
Solid lending growth
Recessionary risk
Margin erosion
Secure Trust lends across six product lines, with real estate (39 per cent of the loan book and 21 per cent of first-half income), retail finance (28 per cent of loans and 33 per cent of income) and motor finance (15 per cent of loans and 27 per cent of income) being the three largest. The loan book has grown at a compound annual rate of 47 per cent during the three years to the end of June 2018, but management has not been sacrificing credit quality in favour of volume. After ceasing to write new sub-prime motor, asset finance and unsecured personal loans in 2017, in favour of areas such as retail and invoice financing, the group’s cost of risk – expected impairment losses as a percentage of the loan book – improved from 2.5 per cent a year ago to 1.9 per cent during the first half. In January, the lender announced plans to stop writing consumer mortgages, amid increasing competition that has pushed up loan-to-value ratios across the market. Given mortgages balances were just £37.3m (2 per cent of loans) at the end of June, that decision is not expected to have a material impact on earnings.
Instead, management has prioritised retail point-of-sale finance, which is shorter in duration than other types of lending and the best quality lending the group writes. Admittedly, shifting to lower-risk areas of lending has reduced the net interest margin, which dropped to 7.6 per cent at the end of June, from 8.2 per cent in the prior year. However, management believes this is close to stabilising. Secure Trust’s lending specialisms mean it is exposed to any downturn in trading conditions for small- and medium-sized enterprises (SMEs), but its conservative approach to writing new business should mitigate some of that risk.
Despite solid lending growth, the group’s regulatory capital levels remain robust, with a common equity tier one ratio of 13.6 per cent and a total capital ratio of 15.1 per cent at the end of June. The latter was boosted to 16.5 per cent at the end of September, after it issued a total £50m in subordinated notes, due in 2028.
| SECURE TRUST BANK (STB) | ||||
| ORD PRICE: | 1,180p | MARKET VALUE: | £218m | |
| TOUCH: | 1,170-1,220p | 12-MONTH HIGH: | 2,120p | LOW: 1,162p |
| FW DIVIDEND YIELD: | 7.4% | FW PE RATIO: | 6 | |
| NET ASSET VALUE: | 1,216p | LEVERAGE: | 10.1 | |
| Year to 31 Dec | Total operating income (£m) | Pre-tax profit (£m) | Earnings per share (p)** | Dividend per share (p)** |
| 2015 | 92.1 | 26.7 | 112 | 72 |
| 2016 | 129 | 35.4 | 148 | 75* |
| 2017 | 138 | 31.3 | 134 | 79 |
| 2018** | 152 | 35.3 | 148 | 83 |
| 2019** | 176 | 45.5 | 187 | 87 |
| % change | +16 | +29 | +27 | +5 |
| Normal market size: | 200 | |||
| Market makers: | ||||
| Beta: | 0.41 | |||
| *Excludes special dividend of 165p a share, following the sale of Everyday Loans | ||||
| **Shore Capital forecasts, adjusted PTP and EPS figures | ||||
