Firing on all cylinders
Secure Trust Bank Plc (LONDON:STBS) has again delivered franchise growth ahead of our expectations, with strong growth in the historic core personal markets and a faster than expected drawdown of SME finance, especially in property. Management has been active in the best-buy deposit tables and raised funding to finance this growth. It also increased its capital in July 2014 in anticipation of this lending. We have upgraded our 2015 revenue forecast by 4% but offset this with further accelerated investment spend.
Increasing loan growth forecasts again
STB has continued to deliver growth ahead of expectations with the end-2014 loan book in excess of £600m against our £580m forecast. We have raised our 2015 estimate to £900m (from £850m). We believe the trend was expected by the market given: (1) a positive trading statement in October; (2) continued presence of STB at the top of best-buy deposit tables, indicating strong appetite for funding; and (3) numerous press articles on the signing of invoice finance customers. However, the scale of increase is likely to be a positive surprise.
Impact on estimates – 2015 key consideration
With the above forecast loan growth lending being in Q414, the impact on 2014 earnings is relatively modest (Edison estimates raised 1%). The trading statement notes 2014 pre-tax will be in line with or above market forecasts supporting modest changes to this year. The key issue is the extent to which 2015 estimates need to be changed. With over £20m extra lending in Q414, the potential uplift to 2015 could be considerable. We continue to be conservative, adding £50m to loan estimates (taking them to £900m), have increased net interest income from £105.2m to £109m and added £1m to fees. We have also raised impairments
modestly (from £23.8m to £24.5m). We believe the improved growth is likely to see investment accelerating from 2016 to exploit the available opportunities. We have increased costs from £64.5m to £68.3m to reflect this. Our pre-tax profits estimates are unchanged. As previously noted, there is the potential in the SME space for STB to grow well ahead of these levels, and we suggest that any such further growth could lead to increased investor returns in the near term.
Valuation: Largely unchanged
With largely unchanged 2015 earnings estimates our average valuation remains £31.0, with a small increase in the Gordon’s growth model offsetting a small reduction in the capital generation model.
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