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Consumer lending champion Secure Trust Bank still has plenty of headroom for growth

Secure Trust Bank (STB) 718P
Gain to date: 8.5%
We suggested buying specialist lender Secure Trust Bank (STB) last summer when the shares were 662p following the positive market response to its first-half trading update.
Prior to that the shares were languishing at even lower levels than during the pandemic, as the market wrongly assumed it would struggle to grow its consumer loan business due to the cost-of-living crisis.
At less than four times forecast earnings and 0.4 times book value, and with a dividend yield of 7.5% which was four times covered by earnings, the shares looked too cheap by far.
WHAT HAS HAPPENED SINCE WE SAID TO BUY?
In November, the bank posted solid third-quarter results with net lending up 14% to £3.2 billion and deposits up 16% to £2.2 billion as the business finance division contributed its highest quarterly new business volumes in over a year.
Earlier this month, the bank released its full-year trading update showing momentum had continued into the fourth quarter with all four divisions delivering record levels of new lending.
As its loan book grows the bank’s cost-to-income ratio goes down which means its return on equity goes up, and the bank is targeting between 14% and 16% return on equity.
Although the shares have rallied, they are still only on 3.5 times this year’s earnings and 0.4 times book value with the same 7.5% yield according to Stockopedia.
WHAT SHOULD INVESTORS DO NOW?
The actual full-year results will be published on 21 March, and while we don’t expect any surprises it is worth saying the bank does operate in the motor finance market. However, it ceased all discretionary commission deals in mid-2017.
Between 2014 and 2017, a mid-single digit percentage of its new vehicle finance loans included discretionary commissions, so actually its exposure is extremely low, but the bank has been up-front about the issue which is to its credit.
We believe there is further upside as the shares still look cheap.
Important information:
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Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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