Secure Trust Bank’s (STB’s) Q423 trading update showcased a robust performance with net loans of £3.3bn, up 13.6% y-o-y. The bank reaffirmed that it is on track to deliver £5m in annualised cost savings in FY24 through its ongoing cost optimisation programme. Despite rising deposit costs, STB’s net interest margin (NIM) remained flat with H123 at 5.4%. STB’s disclosure of modest exposure to discretionary commissions in motor finance lending should be a relief to investors, as the ongoing Financial Conduct Authority (FCA) investigation has been an uncertainty overhanging the sector. Our underlying continuing PBT estimates fell by 2% on marginally lower NIM expectations. Meanwhile, we have reduced our continuing PBT estimate by 7% to £41.7m as we have included a £2.3m exceptional cost related to the FCA’s Borrowers in Financial Difficulty industry-wide review. Our FY24 estimates are unchanged.
Robust loan growth and new chairman announced
Secure Trust Bank (LON:STB) achieved record new lending across all its divisions and all divisions reported net lending growth in Q423. Real Estate Finance rose 3.1% q-o-q and 11.5% y-o-y, while Consumer Lending was up 3.2% q-o-q and 18.4% y-o-y. Year-on-year total new business lending rose 30% but was flat q-o-q. Within this, new lending in Business Finance surged 287% y-o-y but declined 13.6% q-o-q. Consumer Finance new lending advanced 2.3% y-o-y and 7.1% q-o-q. The bank also announced that Jim Brown, incumbent CEO of Sainsbury’s Bank, will join STB as non-executive director effective 31 March 2024, and will succeed Lord Forsyth as chairman following the AGM on 16 May 2024 (subject to regulatory approval).
Underlying FY23 PBT is solid, FY24 unchanged
The bank announced that in H223 it had entered a formal process with the FCA relating to the bank’s collections processes in Vehicle Finance, following an industry-wide review. In response, we have included an exceptional cost of £2.3m in FY23 to cover the expenses associated with the review process. The review is expected to close in H124. Additionally, the bank announced its NIM was in line with H123, so we have marginally lowered our NIM to 5.4% for FY23. Thus, continuing and underlying continuing PBT is £41.7m and £44.0m, 7% and 2% lower than previous expectations, respectively. FY24 estimates are unchanged.
Valuation: Still undervalued compared to peers
Based on our FY23 estimates, STB trades at a diluted price to book value (P/BV) of 0.41x and a P/E of only 4.8x. To trade in line with peers, the implied valuation for STB should be closer to c 0.6x or 1,077p/share, representing an upside of 46%.
Estimate changes and clarity on FCA review
In the trading update, STB clarified that between 2014 and 2017, only a mid-single digit proportion of new vehicle loans represented such arrangements. Given its minor representation in the bank’s lending book, we anticipate any costs associated with the review to be modest. The FCA is expected to report back on its findings in Q324.
In a separate matter, STB is in formal discussions (in common with industry peers) with the FCA regarding its collection processes in Vehicle Finance, as part of the FCA’s Borrowers in Financial Difficulty industry-wide review. The bank has enlisted external support to assist in the review and to enhance its collections process in alignment with FCA standards, where appropriate. STB anticipates the review to conclude by the end of H124. We have accounted for the cost of the review by including a £2.3m expense in the accounts.
Additionally, STB reported that its NIM was flat with H123 at 5.4%, a touch below our FY23 estimates and the medium-term target of at least 5.5%. Adjusting for this, our FY23 operating income estimates have marginally reduced by 1% to £187m. Combined with the £2.3m charge, our continuing PBT estimates have dropped by 7.2% to £41.7m. On an underlying basis however, just incorporating the lower NIM expectations, continuing PBT is £44.0m, 2% lower than our previous estimate.
Consequently, EPS fell 7.6% to 158.9p. The EPS also includes the updated, increased share count which exacerbated the downgrade. In line with this, our DPS estimate decreased by 5% to 39.7p.
Our estimates for FY24 are unchanged, bar the adjustment for the share count increase.
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