lender still looks cheap as UK economy picks up
We don’t often look at smaller banks, but we were interested to see Secure Trust Bank (LON: STB) reporting a strong third quarter performance last week, which appears to be driven by an increase in net lending.
Shares of Bank Solihull have struggled recently, with the stock recently peaking in August to trade at around 1110 before announcing its numbers. But now they seem to be gaining momentum.
The market seems happy with the numbers; stocks are now up at 1240p, and the bank has the potential to return more. He said net lending was up £ 2.4 billion from £ 2.25 billion in the third quarter of 2020. They are also up from the second quarter. Loans to new businesses are also up substantially and a new CEO David McCreadie (formerly of Tesco Bank) is making all kinds of bullish noises about growth in Secure Trust’s consumer and corporate finance segments.
Secure Trust Bank is trading in accordance with the guidance published in its July 12 trading update. The core loan portfolio is now up 3.3% quarter on quarter and 7% year on year. Automobile financing activity is up 15% in three months. Loans to new businesses are up 59% from 12 months ago.
“We… believe that if STB maintains this growth rate, its loan portfolio should exceed our year-end forecast by 3-5%,” said Pedro Fonseca, analyst at Edison Investment Research. “While there has been no formal statement on asset quality or interest margins, management said the bank is trading in accordance with its guidance from the July Update.”
Edison said despite the good news, he is maintaining his estimates for now and his fair value remains unchanged at 2234p per share, using Edison’s net asset value approach.
Diversified commercial loan operation
Secure Trust Bank is active in a diverse range of credit segments, including auto finance, hire-purchase, personal contract purchasing, and dealership finance. He acquired V12 Retail financing in 2012, it gained a share of the lucrative point-of-sale loan market in the UK.
We are always tempted to consider bank stocks from a pre-pandemic versus post-pandemic valuation model. Many bank stocks have been hit hard by the pandemic and its impact on their end customers, especially banks with high exposure to commercial lending. The actions of Secure Trust Bank exhibit many of the characteristics of a post-pandemic recovery game.
A year ago, shares of Secure Trust Bank were trading at around 630 pence, which was almost as low as after the COVID hit. Since then, the stock has steadily increased in value as the UK economy has started to ignore some of the effects of the pandemic and the government has remained proactive in supporting business. Stocks still haven’t come back to where they were before COVID however.
Secure Trust Bank shares still look cheap
Secure Trust Bank always looks ridiculously cheap with an estimated PE ratio in 2021 of around 5.86 according to Stockopedia (12 rolling months is approximately 6.15). It is covered by four brokers, who maintain a consensus of strong buy. The consensus price target is 1797p. This is still a long way from where it is currently trading, which is 1240p.
On Budget Day tomorrow, so there are a few possible risk factors for small banks in the Chancellor’s speech aside, but that aside, momentum appears to be building behind Secure Trust Bank with the 50-day MMA at + 1.46% and the 200 to + 10.5%. Keep an eye out for this one if you like banking.