Secure Trust Bank (STB) is becoming a more focused operation, concentrating on specialist lending and reducing its exposure to sub-prime credit and unsecured debt. The alternative lender has been growing its loan book strongly across motor, SME credit and real estate finance, generating returns on equity at the top end of the sector. However, a prudent approach means it also has one of the highest core tier one capital ratios and one of the lowest levels of leverage among UK-listed lenders.
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.
The shares are trading at 1.6 times forecast net tangible assets per share of 1,324p for 2017. This is a discount to the rating of 2.1 times at the same time last year - before the market's Brexit terrors. While this may be a slight premium to other challenger banks, we think it is more than justified by Secure Trust's discipline and growth potential. Buy.
A brief third quarter trading statement from Secure Trust Bank (STB) on Friday showed the challenger bank suffering no impact from the Brexit vote, said Gary Greenwood of Shore Capital.
Greenwood maintained his buy rating saying he still expected adjusted pre-tax full-year profits of £33.4 million and adjusted, diluted earnings per share of 140.5p. The shares have jumped 25% since the analyst recommended them after half-year results in July. Greenwood said there was still upside in the stock although Shawbrook (SHAW), another of his buy tips, offered better value.
Secure Trust Bank trades on 16.8 times forecast earnings for this year, 1.9 times tangible net asset value and yields 3.2%, said Greenwood. Such premium ratings reflect the groups strong track record, well-regarded management team, attractive growth prospects (at high returns) and the strength of its balance sheet, which currently includes material surplus capital following the disposal of Everyday Loans to Non-Standard Finance earlier this year, he added.
"Shareholders in Arbuthnot Banking Group (ARBB) have approved the sale of shares in Secure Trust Bank (STB) that will leave the former parent as a sub-20% shareholder in the group. STB already has significant capital headroom to accommodate strong organic loan growth following the sale of Everyday Loans Group. Its plan to seek a Main Market listing will enable it to appeal to a broader investor audience, leaving it better placed to consider share issuance, providing greater flexibility to pursue a wider range of strategic options. This comes at a time of rapid growth and proliferation of contenders among specialist lenders and challenger banks."
Edison note out this morning, scraped from research tree.
Read Edison's note on SECURE TRUST BANK, out this morning, by visiting https://www.research-tree.com/company/GB00B6TKHP66
"Secure Trust Bank is an established challenger with a record of organic profitable growth. The Everyday Loans Group sale provides substantial regulatory capital for organic and potentially inorganic growth. The move into mortgages will further diversify lending. Despite a record of rapid loan book expansion, an ROE/COE valuation model suggests the market is reluctant to make full allowance for profitable employment of the surplus ..."
I noted with interest the sale of Everyday Loans by Secure Trust Bank
(STB: 3,389p) to Non-Standard Finance (NSF: 89p), a newly listed finance company I recommended buying shares in earlier this year ('A non-standard investment', 2 March 2015). The disposal also has implications for shares in Arbuthnot Banking Group
(ARBB: 1,530p), a company I included in my 2015 Bargain share portfolio and which has a 51.9 per cent stake in Secure Trust Bank.
Led by the former chairman of subprime consumer lender Provident Financial
(PFG: 3,541p), John Philip de Blocq van Kuffeler, Non-Standard Finance's board is in the early stages of creating a niche-finance company focused on the consumer unsecured lending market. To execute this strategy the company is specifically targeting acquisitions that generate an annual return on equity of between 20 per cent and 30 per cent, have potential to grow lending balances by at least 20 per cent a year, offer strong yields underpinned by APRs of between 50 per cent and 100 per cent, and with impairment levels implying an attractive ratio of risk to the APR.
The companys first acquisition, Loansathome4u, the home credit division of finance company S&U
(SUS: 2,399p), completed during the summer (Value judgements, 3 August 2015), and the purchase price of £82.5m equated to 12.5 times net profit and 2.5 times tangible book value. Everyday Loans is a much larger deal altogether and commands an enterprise value of £235m. Its more expensively priced at 18 times net operating profit after tax, but importantly its faster growing too. In the first half of 2015, Everyday Loans increased operating profit by 10 per cent to £7.6m on revenues and a loan book up 12 per cent to £21.2m and £102m, respectively, having previously delivered annualised growth of 17 per cent in its net loan book between 2012 and 2014 which in turn boosted annual operating profit by 90 per cent to £15.5m over the two-year period.
Mr van Kuffeler believes that the fast growing business can deliver even more with Non-Standard Finances financial backing. To achieve this the plan is to ramp up its branch expansion programme (Everyday Loans has only opened seven branches since 2012 to take the estate to 35 shops); accelerate its guaranteed loans operations by improving lead generation through its broker network; and by targeting a broader customer base and offering a wider range of products. Its worth noting too that given the funding structure of the acquisition it will be immediately earnings accretive.
Thats because of the £235m consideration, £215m is payable in cash of which £108m will be used to settle intercompany debt with Secure Trust Bank. The vendor is also accepting £20m of equity in Non-Standard Finance shares. To fund the balance of the consideration, Non-Standard Finance will drawdown £35m of a new £55m three-year revolving credit facility with Royal Bank of Scotland and Shawbrook Bank. Secure Trust Bank is providing a £30m term loan to the company over the same term.
In addition, the company is raising £160m through a placing and open offer at 85p a share. Qualifying shareholders on Non-Standard Finances share registrar on Thursday, 3 December are entitled to participate in the open offer by subscribing for 59 new shares for every 33 currently held. This means that if you followed my original advice to buy the shares at 103p in March, then this brings your average buy-in price to 91.5p, marginally above the current share price which has adjusted downwards to reflect the change in share capital. The companys pro-forma net asset value is about £266m post the acquisition and capital raise which based on 311m shares in issue equates to a book value per share of 86p.
In the circumstances, I would recommend you take up your open offer allocations at 85p a share given that the funding structure means the acquisition is immediately earnings accretive and thats before fac
Looking good with ""As a result of the growth in lending balances coupled with continuing lower levels of impairments and firm operational cost control Secure Trust Bank PLC anticipates full year results to be at or above the upper end of market expectations"".
I bought in awhile ago and am on a small loss at present.
not really, maybe the acquisition, which was made a bit cheaply, inherently suspicious, having a look but they seem to have trouble making a fast growing balance sheet translate into profit, how unusual for a bank )))
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