Secure Trust Bank (LSE:STB) — Interim Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the SECURE TRUST BANK PLC Investor Presentation. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish our responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now

0:33 like to hand you over to CEO, Ian Caulfield. Ian, good afternoon, sir. Thanks ever so much and thanks everyone. I'm absolutely delighted to be at our first Investor Meet session and to take you through our results for the first half of of twenty twenty six. I promise the presentation will get more interesting, but there weren't a doubt unless otherwise flagged. Rachel and I will be commenting on continuing adjusted numbers and metrics. During the presentation, I'm gonna cover both strategic and financial highlights along with the outlook for the balance of the year before obviously taking taking your questions. However, what I wanna start with are the five specifics that we think underpin the investment case for SECURE TRUST BANK. Firstly, we're operating in large and attractive markets where we have genuine specialist expertise and clear opportunities for growth. Across retail finance, business finance and savings, the addressable markets available to us are substantial.

1:32 Secondly, our model has significant operating leverage. Much of the infrastructure required to support future growth is already in place. As we continue to scale, we expect revenue growth to outpace cost growth, supporting our goal of reducing the cost to income ratio to between 3540% in the medium term. Thirdly, growth and cost efficiencies together create a clear pathway to higher returns. This is not dependent on one transformational initiative. It's the cumulative impact of multiple actions that are already underway. Fourthly, we're now operating with a reduced cost of risk. Credit discipline remains central to how we run the business, and we're seeing the benefits of improved qual portfolio quality and disciplined underwriting.

2:19 And finally, we're well capitalized. That gives us the flexibility both to support growth and to increase shareholder distributions with our £10,000,000 buyback program already underway. I think though, for me, what I'm proud of is the fact that the first half of the year and the performance that we produced just further enhances these trends that I've talked about. Growth profitability and return on required equity are all consistent with our guidance. The vehicle finance exit is now complete. That's been a major strategic program for the group and completing it successfully removes complexity, releases capital and allows management to focus entirely on our continuing growth businesses.

3:06 The investments we've made in product development are being able to generate tangible results. We've launched new products, entered new partnerships, and broad broadened distribution channels across the group. I'll talk more about that later. And finally, we've executed strongly on cost reduction. Importantly, this is not just a plan on paper. A substantial proportion of the targeted savings are already delivered or contractually committed. Taken together, these developments reinforce our confidence in both our near term guidance and our longer term ambitions. The business has been materially simplified over the course of recent years, and we now operate three complementary businesses. Retail finance provides point of sale finance solutions through long standing retail partnership partnerships and serves around 1,300,000 customers.

3:57 Business finance provides specialist secured lending to UK SMEs and property investors. And our savings franchise provides a stable and scalable funding base with more than £3,000,000,000 of customer deposits. Each business though critically has a clear right to win. Retail finance combines bank balance sheet strength with fintech capability. Business finance benefits from specialist expertise and deep customer relationships, and savings utilizes digital technology to unlock a loyal customer base and diversified funding. What's particularly attractive is how these businesses work together. They create a diversified earnings profile, funding stability, and multiple opportunities for disciplined growth.

4:47 Our strategy also remains straightforward. We're focused on driving targeted growth for higher returns through three priorities. Firstly, product expansion. We've added products, capabilities and distribution channels where we see attractive risk adjusted returns. Secondly, digital capability. Better technology improves the customer experience, increases efficiency and strengthens scalability. And thirdly, and critically, capital discipline. Every investment decision is assessed against its ability to create shareholder value. These priorities support our medium term targets of around 10% annual lending growth and our North Star goal, return on average equity above 16%.

5:35 Now investors sometimes ask me, what is it that gives you confidence in achieving returns above 16%? Our confidence is built on the fact that delivering this doesn't require a substantive step change or a material investment paying off. There are just four drivers. Firstly, we need to continue business growth at around 10% annually. That's in line with the group's historic growth rates. Secondly, we need to maintain risk adjusted margins through disciplined pricing and underwriting. Thirdly, we need to keep a risk weighted asset mix broadly consistent with today. And finally, we need to leverage our operating platform so that costs grow more slowly than revenues. We've already made meaningful progress against all of those areas.

6:24 Our return on required equity in the first half was 14 and a half percent and reflects a business that was that is transitioning from restructuring into growth. As cost savings flow through and capital is deployed into new opportunities, we see a clear path for further improvement. So turning to some of the numbers that we announced today. Our first half performance follows that very clear trajectory to higher returns. Customer lending increased to £3,500,000,000 reflecting continued growth in both retail finance and business finance. Adjusted profit before tax increased by 9.4 to $31,300,000,000 and risk adjusted margins remained stable alongside an improvement in cost of risk.

7:12 Our CET1 ratio, the key capital measure for most banks increased to 14.3% providing substantial capital flexibility whilst remaining comfortably above our 13% ambition and, of course, well north of regulatory hurdles. We've also begun returning that capital to shareholders through both an increased interim dividend and our share buyback program. Overall, this is a set of results that demonstrates balance. We're growing. We're improving returns. We're managing risk carefully, and we're returning capital. That's the combination of outcomes that we want to deliver. But what I'm equally proud of is the strategy that we put in place and the delivery against that in the first half.

8:00 On product expansion, we've secured exciting new partnerships with Magnet and Centrica British Gas. These scale relationships will strongly underpin our previously announced push into point of sale credit for home improvements. In business finance, we've grown our bridging proposition and launched specialty finance, and our deposit business has broadens its distribution by launching our first aggregator partnership via the number one player, Hargreaves Lansdowne. On digital delivery, customer adoption of our v 12 app continues to increase. We've now got over 666,000 users. Our bridging portal is live, and we're simplifying our technology architecture to improve both efficiency and scalability.

8:47 And on capital discipline, we've completed the first tranche of the buyback program while taking actions that deliver approximately £15,000,000 of annualized run rate savings against the 25,000,000 that we announced we get to by the end of twenty twenty eight. The common theme across all three areas is execution. Rather than focusing on aspirations or intentions, the business is demonstrating measurable progress. That's the excitement for us moving from strategy into delivery. The first half has shown we can make that shift and I'll return later on to some of our priorities across the course of Q2. What's also important though as you consider Secure Trust is the guidance that we've given to to analysts as to where we're gonna land.

9:36 Critically for me in in amongst the list that's currently displayed on the screen are the key things that drive us towards our medium term targets. Where are we going to be on net lending, on RAM and on CAS? And you can see that we've guided in year to where those numbers are going to land. That takes us on the trajectory to those medium term targets that I talked about earlier. What's also important to look at though is, of course, what analysts are saying, what are their expectations in terms of the bank. We're covered by three different analysts. All of them have us on a buy recommendation. And essentially, that's because what they see is likely increases in PBT, improvements in ROAE as we move to that medium term target,

10:19 translating strongly into growth in NAV and value in the bank. Today, we're currently sat at £20.85 in terms NAV with a share price sat around £16. So I think that probably underlines the value that we think is there in the stock and clearly that the analysts see as well. We're gonna be adding Cavendish to our set of analysts over the course of the of the coming weeks, And I'd urge you to go to their website and check out some of their reports alongside our existing brokers. So analysts can see some of the value being there in the business. But the critical question for all of you is can we repeat the first half results in the second half and ongoing?

11:06 So for us, there are three key priorities. Firstly, we want to make sure that we continue to deliver growth through existing and newly launched products. Secondly, we're going to deliver the next phase of our cost program and technology simplification agenda. And thirdly, we'll complete the remaining £5,000,000 tranche of our buyback program from September onwards.

11:30 While the macroeconomic outlook remains uncertain, we believe SECURE TRUST BANK is well positioned. Ultimately, our retail finance customer base are high quality middle class borrowers. Our business finance portfolio is well secured, and our savings franchise provides stable and diversified funding. The business model has proved resilient through different economic cycles, and we believe we're well placed to benefit from any stability or improvement in the broader environment. So let me close, again with the investment case. SECURE TRUST BANK today is a simpler, more focused, and better capitalized business. We operate in attractive specialist markets. We have multiple opportunities to grow. Credit performance remains resilient.

12:17 We're reducing costs and increasing efficiency, and we have capital strength to both support growth and increase returns to shareholders.

12:27 Of course, there remains work to do in ensuring delivery in an unstable macro environment, but the first half demonstrates that our strategy is working. We've delivered strong performance, completed a major strategic transition, and made meaningful progress towards our medium term goals. I'm now going to hand over for questions, and I'm delighted that Rachel Lawrence, our CFO, is going to join me in taking your thoughts and questions. Excellent. Ian, if I may just jump back in there and just bring Rachel on screen for Q and A. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the right hand corner of your screen. But just while the company take a few moments to review those questions that have been submitted already, I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A, can all be accessed via your investor dashboards.

13:19 Guys, as you can see there, we have received a number questions, and thank you to all of those on the call for taking the time to submit their questions. But Phil, at this stage, sir, if I

13:27 may hand over to you to chair the Q and A with the team. And if I pick up from you at the end, that would be great. Thank you. Okay. Thank you. So our first question is from Tom W. Tom asks, where do you see the biggest opportunities to gain market share? Well, I guess the the good thing about about SECURE TRUST BANK is that each of the three markets that we're operating in, we've got a relatively small market share of those of those different spaces. But if I go through them in terms of retail finance, we've got about a 15%, actually 17% share now in the markets that we were looking to address. However, in areas like home improvements, we have no share of the point of sale lending market, and therefore, we're starting from zero and growing from there. So there's a substantive opportunity for us to to broaden our growth in that respect.

14:19 We also have 1,300,000 customers, all of whom only have point of sale lending with us. So there are opportunities down the track for us to broaden the product base that we market into those customers. In business finance, we've got less than a 2% share of a £90,000,000,000 market. So there are substantial opportunities there for us to grow. And I guess part of why we broaden the product set in that space is to enable us to take some of

14:46 those opportunities. And in deposits, we've got £3,000,000,000 of a £2,000,000,000,000 market. So I think you can probably see that there are that there shouldn't be too many challenges in terms of making sure that our funding growth matches our asset growth. Next question is from Matt H. Can you give us some color on the £35,000,000 specialty finance pipeline and the type of risk return characteristics you're seeing within the opportunity set? Yeah. Sure. Maybe I'll comment, then and then Rachel could talk about some of the returns that we're that we're seeing. Ultimately, for us, this is this is a substantial opportunity. That's why we've launched into that space.

15:33 We've added additional capability into our team to make sure that we can probably properly assess and underwrite those those new deals. We wanna make sure that we're lending against quality and established borrowers, and that's our focus. And actually, we've got a strong pipeline that reflects exactly that. It is a market that's reasonably well established, but there are still opportunities for new players to take new deals by essentially being able to move and assess assess those risks effectively. The returns look attractive to us, but, Rachel, maybe I'll pause at that point, and and maybe you can comment from that point of

16:12 view. Yeah. I'd agree. The the the returns are pretty attractive. They follow the same kind of returns that we would see from our wider ABL business, and they're complementary in terms of being able to widen what where we can actually lend into within asset based lending. So very attractive. But as Iain said, we're going into to the area carefully and slowly and making sure that we have all the processes and that we understand the risk that we're taking on before we launch too heavily into specialty finance. Thank you. Next question is from John R. With nineteen home improvement retailers already onboarded and further opportunities in the pipeline, what is the typical time lag between signing a partner and seeing meaningful lending volumes?

17:00 Well, some of that depends on the the on the partner to state the obvious. We can we can integrate very rapidly. That's one of the strengths of our technology. We can literally we can literally integrate it overnight with a with a with a new partner. But obviously, that depends on on on obviously their priorities from a tech perspective.

17:20 Then in terms of in terms of us sort of ramping those volumes up, again, you need to build some awareness amongst the amongst the customer base. But typically, what we say is in about six weeks between signing and and launching, we're seeing substantial ramp ups in volumes from from individual and new customers. I guess the difference with bigger retailers is obviously some of them are on a cyclical basis. So obviously people buy gas boilers for instance in the winter, so you typically get more volume through that through that period of time. So again, it sort of comes back to the sector, but, you know, these are not massively long lead times. It's not that you've got a long integration process or that you've gotta sit there waiting for volumes to flow because typically, we are doing deals with established retailers who already have customers coming through the door. And essentially, we just need to make sure that we get that credit proposition in front of them.

18:19 Okay. Thanks. I'll move on to the next question, which is again from Tom W. Are there adjacent lending products you could enter using your existing distribution and underwriting capabilities? Yes, Tom. There definitely are. I think there are in retail finance and in business finance. I think to your earlier question about returns, ultimately, we're looking for product areas where where those adding them into the set are going are going to be accretive to our overall ROE. So we wanna make sure that we are focused in any new launch on things that are going to do that. But, you know, I think I think if the sort of underlying question is is are there continued opportunities for growth in this business? I would say very much so.

19:06 As I say, we've got relatively small market shares of the markets that we're currently seeking to address and opportunities to continue to broaden our footprint over time. The excitement for me though in having the product set that we've now got and could move to over time is less about growth because frankly, I've I've you know, having spent twenty five years in the in the industry, anyone can grow a business. But it's about the capacity to choose where you want to grow in order to make sure that you can match your return profile over time. That's the power I think we get from the broader product set that we have. And that I think is what's gonna really give the business an extra lift as we go through time. Excellent. We have another question from John. Are are you seeing any increased competitive pressure in your lending markets?

19:57 And how much pricing discipline are you willing to sacrifice to achieve the 8% to 10% growth target? So, well, I think the short answer is our North Star goal is that north of 16% return on equity. So we're we're we're not we're not prepared to sacrifice much pricing discipline in order to get there. We want we want to continue to grow. We think we've got great opportunities to grow in an accretive way. But the reason that our targets are set as circa 10% growth in annual net lending, but and north of 16% ROE is essentially because that second target is the key one for for us. If we can get 16% plus with less than 8% growth, then I'm I'm very relaxed about that. This is a business that should be seeing growth because there are opportunities for us to do so in an accretive way, as I say. But, ultimately, it's hitting that ROE target that is the is the critical thing for us as a business.

20:58 Okay. Thanks, Ian. We have no further questions. Perfect, guys. If I may just jump back in at this point, and thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. But Ian, perhaps before really now just looking to redirect those on the call provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that'd be great. Yeah. Sure. Thanks ever so much, and I appreciate everyone giving us, some time this afternoon. I guess what I'd just say is SECURE TRUST BANK, which, you know, this may be your first introduction to it. We've got an experienced leadership team. We've got a clear strategy.

21:43 We're doing what we said we'd we'd do. Our priorities in the second half are very clear. And I think as you can see in terms of where analysts are placing their stock, there is very real value here. And I hope you'll consider us as a home for your investments as as we go forward. Perfect, Ian. That's great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SECURE TRUST BANK PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.