Secure Trust Bank: Fair Value, Upside From Deals
Edison | Mar 29, 2013 06:18AM ET
Secure Trust Bank (STB.L) is growing both organically and by acquisition, bringing diversification of credit risk, distribution and improved operational capabilities. Organic loan growth remained strong at 44% and there were three significant acquisitions to build future growth. STB continues to be strongly funded and capitalised, and well positioned to exploit opportunities as major banks continue to re-structure. The valuation reflects current opportunities and not potential upside from further acquisitions.
Core growth including pay-back on investments
STB organic loan growth was 44% with personal loans up 56%, retail points-of-sale up 51% and motor finance by 41%. Deposit growth was 47% with a year-end loan-to-deposit ratio of 75% (rising to 84% with the V12 acquisition in early January). Current account customer numbers grew by 22% with income up 34%.
New investments
STB acquired Everyday Loans (consideration £1 with conditional performance payment £1.7m, 8 June 2012, fair value gain £9.8m), V12 Group (consideration £3.5m, 3 January 2013, at NAV) and Debt Managers (consideration £0.8m, 15 January 2013, at NAV). These deals will in aggregate add c £100m to the loan book, bringing diversification of credit risk, distribution and improved operational capabilities. Everyday Loans (EDL) pre-acquisition related management bonuses added £1.8m to profit since acquisition.
Net-positive accounting distortions to 2012 results
The EDL acquisition introduced a number of items to the statutory accounts, with a net positive of £5.3m in 2012. 2013-14 profits will be depressed below what may be regarded as a normalised rate by the unwind of the loan fair value adjustment, intangible amortisation and fees on new business being spread over the life of the loan (historic ones are taken in full in the fair value adjustment).
Valuation: Fair value now, Upside from deals
As a growth financial company, STB has few peers but its P/E is well below Hargreaves Lansdown or Brooks MacDonald. Our Gordon’s growth model indicates a fair value of £17.88 but this increases by c £3 if we move forward to 2014 NAV rather than 2013. Our capital generation model indicates £20.44. We do not include acquisitions until completed and there is potential upside from further deals.
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