Secure Trust is among our star picks in the banking sector
We aren’t fans of the mainstream high street banks or many of the so-called challenger banks – Metro Bank (MTRO) being a prime example – but one stock which catches our eye due to its high profitability and low valuation is Secure Trust Bank (STB).
Founded in the West Midlands in 1952, it has 1.4m customers and as of the end of June it had deposits of £2bn and loans of £2.28bn.
It lends to businesses and consumers. For businesses it offers commercial finance, which is helping companies with cash flow; asset finance, which is helping companies make investments in plant and equipment; and real estate finance which is mainly bridging and other loans for small developers.
For consumers it offers motor finance, retail finance, debt management and mortgages. However it decided to stop new mortgage lending earlier this year because margins are so poor – according to a Bank of England study the average spread was just 1.6% in April – and it has used the capital for retail and property finance where returns are much higher.
Profit in the first half of 2019 grew by 20% to £18.1m, driven by a 32% increase in retail finance loans to £670m and a 25% increase in real estate loans to £879m.
Although forward-looking economic indicators point to low business confidence and low growth, the bank hasn’t seen a change in consumer behaviour. As chief executive Paul Lynam points out, the short duration of its asset portfolio means it can react quickly to opportunities or threats.
In the case of an orderly Brexit there is likely to be a sharp spike in demand for working capital and asset finance from businesses and real estate finance from developers. Consumer confidence and retail sales should also pick up once the cloud of a ‘no deal’ Brexit is lifted.
On the other hand if there is no deal the bank can turn off the taps quickly to reduce the amount it lends while maintaining its strong credit quality (the ‘cost of risk’ is currently 1.7% of loans).
It’s also worth highlighting the bank’s low cost-to-income ratio (55.9%) and its return on regulatory capital (13.6%) which set it aside from most other banks.
The shares are trading on just 7.5 times this year’s forecast profit and six times 2020 estimated profit while they yield nearly 7%, which is in line with Lloyds (LLOY) and HSBC (HSBA) despite Secure Trust Bank being better quality and lower risk.