Secure Trust Bank Interim Results

Secure Trust Bank (STB) has continued to use its strong funding (loan-to-deposit ratio 87%) and capital positions (tier 1, 15%), to fully exploit the market opportunities created by the financial crisis. Annual organic loan growth was 53% and broadly spread across the group. The acquisition of Everyday Loans added a similar amount to the portfolio. Heavy investment continued but costs grew by £2.2m against revenue growth of £3.3m. The credit experience remained good. Excluding the acquisition accounting gains, underlying profits on a company basis grew 50%. We expect strong growth to continue.

Organic growth
STB has organically increased personal lending by 60%, motor by 61%, retail point of sale by 63% and the overall organic lending by 53%. Having pre-funded any potential deals earlier, deposit growth in H112 was 37% leaving the end June loan to deposit ratio a comfortable 87%, a level we expect to be broadly stable from here. Gross fees and commissions rose 15%. Credit costs remain well controlled rising 68%.

The management objective of growing non-interest income was affected by fees payable to brokers for introducing lending. OneBill fees are somewhat below last year’s run rate while current account fees, aided by the internet enhancement in April, are somewhat higher. Looking forward, the drag from OneBill should moderate, the current account fees accelerate and further contribution from the budget account to be launched later in the year.

Acquisition-related complexity
The acquisition of Everyday Loans has introduced material complexity to these, and future, numbers. Specifically we note the positive fair value adjustment taken through the P&L in H112 of £8.9m gross, £8.5m net of amortisation in H112. This number includes intangibles, such as customer relations, which will be amortised (ie negative P&L impact) over the next two to three years.

Valuation: Organic growth only being valued
Our approach remains conservative, as we only value the expected organic growth in the business. There remain multiple opportunities for further inorganic growth, which may be expected to add value to STB. On our approach, the shares are at a modest discount to the range of valuation approaches we adopt (average value c 1,223p) up from previous levels (1,075p) primarily reflecting the equity boost from the acquisition accounting and by rolling forward estimates by one year.

To Read the Entire Report Please Click on the pdf File Below.