Secure Trust Bank Plc – Maintained Strong Capital Levels and Solid Liquidity Position

Secure Trust Bank PLC (LON: STB) is the United Kingdom-based retail bank, providing saving account and lending services with 1.5 million customers and 956 employees. It was founded in 1952.

On 15 October 2020, the Company will announce the third-quarter trading update.

Rationale for Valuation – Speculative Buy at GBX 625

• As per valuation metrics, EV/Sales, Price/ Cash Flow and Price/ Book Value multiples of the STB are currently lower as compared to the corresponding multiples of the Banking Services industry. It reflects, shares are undervalued as compared to the industry.
• The Company recorded a higher net margin of 6.40% (H1 FY20) against the industry median, which reflects that STB is well placed to tackle the challenges ahead.
• Capital ratios improved due to a combination of profitable trading, lower RWAs and these transition relief changes. CET 1 ratio increased to 13.5% year-on-year.
• From the technical standpoint, 14-day RSI stood at 45.69, which is supporting the upside movement.

Key Risks

• Market volatility can impose liquidity risk with an impact on the lending volumes. Also, the risk of cybercrime and dependency on technology continues to grow.
• The ongoing Covid-19 mayhem may also impact the business growth trajectory in the near term.
• To meet the new regulations, the Company needs to implement new processes, failing to do so would increase the compliance risk.

Financial Highlights (for the six months to 30 June 2020 (H1 FY20), as on 6 August 2020)

(Source: Company Website)

• The Company has improved the capital positions, with CET 1 ratio of 13.5% and total the capital ratio of 15.9%.
• H1 FY20 shareholders’ equity increased by 7.9% year-on-year to £259.3 million (H1 FY19: £240.3 million).
• Customer numbers surged and encouraging signs in Q3 regarding the markets for the Consumer Finance products.
• Overall results were impacted by impairment charges associated with the potential worsening of economic conditions.
• The Group has maintained a strong liquidity position and robust balance sheet.

One Year Share Price Chart

 Daily Chart as of 11 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

In Q3 FY20, the Company expects an increase in customer demand, mainly in Motor Finance and V12 Retail Finance. In recent months, base rates have fallen to approximately 0% and the market is now pricing in negative rates. However, the Company has maintained the liquidity ratios in excess of regulatory requirements throughout the year and continues to hold significant levels of high-quality liquid assets. Further, STB entered 2020 on the back of successful years in 2018 and 2019 and has delivered a profit before tax notwithstanding the very challenging environment in H1 FY20. With stronger capital and liquidity positions and robust balance sheet, the full-year results are expected to be aligned with market expectations, and it showed a moderate demand for consumer and housing finance.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Secure Trust Bank at the closing market price of GBX 625 (as on 11 September 2020), with lower double-digit upside potential based on 0.58x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

*The “Speculative Buy” recommendation is valid for the current price as covered in the report as on 14^th September 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.