Company Updates - STB

This is my first update on Secure Trust Bank since publishing my research report back in July. We've subsequently had the interim results for the six months ending 30th June 2024, which I'll go through today.

Here are the highlights:

• Net interest income was £88.2m in H1 2024, up 8.9% on the £81.0m generated in H1 2023. Net fee and commission income was slightly down at £7.9m (1H23: £8.1m), leading to 7.9% growth in operating income to £96.1m (1H23: £89.1m).
• Net interest margin fell slightly to 5.3% (1H23: 5.4%), as the rise in yield to 10.7% (1H23: 9.3%) didn't quite offset the increase in cost of funds to 5.4% (1H23: 3.9%).
• The net impairment charge rose to £28.2m (1H23: £23.0m), as the company was forced to pause its vehicle finance collections activity while it implements some changes to the collection process coming from the FCA's review of Borrowers in Financial Difficulty (BiFD). Default rates are expected to return to a more normal level by the end of the year, along with the associated impairment provisions.
• It's worth pointing out that the impairment charge here relates entirely to expected credit losses; there weren't any loans written off directly to the income statement (1H23: £6.3m written off).
• The net impairment charge resulted in a cost of risk of 1.7% (1H23: 1.5%), while impairment provisions of £101.6m (1H23: £79.5m) equated to a provision cover of 2.9% (1H23: 2.5%).
• Operating expenses saw a small increase of 3.6% to £51.6m (1H23: £49.8m), resulting in a cost income ratio of 53.7% (1H23: 56.9%). This has been helped by management's cost optimisation programme (Project Fusion), which is on track to deliver £5m of annualised savings by the end of the year (against FY21 benchmark).
• A newly announced extension to the programme is targeting a further £3m in annualised savings by the end of 2025. All this should help progress towards their target cost income ratio of 44-46%, when the loan book reaches the required scale.
• Profit before tax rose 3.6% to £17.1m (1H23: £16.5m), and net profit rose 4.1% to £12.8m (1H23: £12.3m), equating to 67.2p per share (1H23: 65.8p).
• Loans and advances after subtracting impairment allowances grew 8.3% to £3,421.6m (1H23: £3,158.5m), with all segments seeing loan book growth. I'll go through each segment in more detail shortly.
• Cash and equivalents increased from £318.3m in 1H23 to £412.2m in 1H24. Over the same period, deposits from customers grew from £2,648.9m to £3,042.7m and amounts due to banks fell from £409.3m to £359.1m.
• The reduction in amounts due to banks reflected repayments of drawings from the Bank of England's TFSME scheme, ahead of it maturing in 2025. The intention is to repay the remaining balance using new deposit funding.
• Total equity increased 6.7% to £355.5m (1H23: £333.2m), with the tangible component being £350.2m (1H23: £326.7m). This equates to a tangible book value per share of £18.36 (1H23: £17.46) using the number of shares in issue at the period end.
• Return on average equity for 1H24 was 7.3% annualised (1H23: 7.5%) - still quite a way below the medium term target of 14-16%.
• The company remains well capitalised, with a CET 1 capital ratio of 12.7% (1H23: 13.0%), and total capital ratio of 15.0% (1H23: 15.1%). The latter benefited from the amount of Tier 2 capital eligible for inclusion rising to £61.5m (1H23: £56.7m), in line with the increased Total Capital Requirement of £246.2m (1H23: £226.7m).
• Liquidity was similarly well covered, with liquid assets totalling £433.9m (1H23: £347.3m) and an average Liquidity Coverage Ratio of 216.4% on a rolling 12 month basis (1H23: 217.0%).
• Deposits continued to shift towards ISAs and access accounts, as they now make up 23% and 24% of deposits, respectively (1H23: 19% and 15%), while fixed term bonds and notice accounts decreased to 50% and 3% (1H23: 54% and 12%). The ISAs offered are also fixed term, so the balance between fixed term and instant access/notice has remained roughly the same.
• The loan to deposit ratio decreased to 112.5% (1H23: 119.2%), while the funding ratio increased to 112.3% (1H23: 109.8%). Both moves were largely due to deposit growth exceeding that of the loan book.
• Within the retail finance segment, new business lending was up 5.2% to £645.1m (1H23: £613.5m), while the net loan book (after subtracting impairment provisions) grew 11.5% to £1,315.4m (1H23: £1,179.9m).
• The net interest margin for the segment was 6.6% (1H23: 6.3%), and thanks to a very low cost of risk of 0.7% (1H23: 1.6%), the risk adjusted margin came in at 6.1% (1H23: 4.9%).
• STB's share of the retail finance market has grown from 13.5% at 31 Dec 2023 to 17.0% at 30 June 2024, reflecting new business growth at a time the overall market has contracted.
• As alluded to at the AGM, the AppToPay proposition is being evolved to offer a mobile-based service platform for all retail finance products, thereby allowing all retail finance customers currently registered for online account management (84% of customers) to service their account via their mobile phone.
• Vehicle finance new business lending remained roughly flat at £248.8m (1H23: £250.1m), while the net loan book grew 13.1% to £497.9m (1H23: £440.4m).
• The net interest margin fell to 9.5% (1H23: 10.9%), largely due to an increasing mix of prime lending (38.1% vs 29.9%). The aforementioned BiFD-related impairments resulted in a cost of risk of 8.8% (1H23: 2.4%) and risk adjusted margin of 1.1% (1H23: 9.1%).
• The stock funding product launched in 2019 now has 286 active dealers (1H23: 233), with credit lines of £54.2m (1H23: £45.3m).
• Overall customer numbers have increased 8.3%, and the business has held its vehicle finance market share of 1.2%.
• The FCA had previously said it would communicate its next steps in relation to its review of discretionary commission arrangements in Sep 2024, but this has now been pushed back to May 2025.
• Real estate finance new business lending dropped by 46.3% to £135.5m (1H23: £252.4m), reflecting a more subdued market in the face of higher interest rates. This is also visible in loan defaults which have risen by 93.3% to £77.7m (1H23: £40.2m).
• The overall net loan book still saw a modest increase to £1,271.5m (1H23: £1,221.8m), and an average loan-to-value of 57.1% kept the cost of risk down to 0.5%, despite the elevated defaults.
• Net revenue margin and risk adjusted margin were flat on the prior year at 2.6% and 2.2% respectively (1H23: 2.6% and 2.2%).
• Commercial finance new business lending was pretty well the same year-over-year at £32.4m (1H23: £31.4m), while the net loan book grew 6.4% to £336.8m (1H23: £316.4m).
• Net revenue margin of 6.3% (1H23: 7.3%) was down on the prior year due to a higher cost of funding and slightly reduced fee income, but the risk adjusted margin of 6.3% (1H23: 3.2%) was significantly higher as a result of a one-off impairment charge incurred in H1 2023 vs nil in H1 2024.