Secure Trust Bank Regulatory News (STB)

Secure Trust Bank PLC13 January 2017

Secure Trust Bank PLC ("STB" or the "Group")

Pre-Close Trading Update

Secure Trust Bank PLC ("STB" or the "Group") today issues a pre-close trading update ahead of its annual results announcement for the year ended 31 December 2016 scheduled for 23 March 2017.

A year of excellent progress ended with a very busy and productive final quarter.

Trading in the final period of the year has been in line with management's expectations and as a result STB anticipates the full year results will be in line with market expectations. The combined effects of the performance of the continuing operations in and the one off profit arising from the sale of Everyday Loans means that 2016 is expected to be the tenth successive year when the return on required equity is in the region of 30%. As set out in our interims results, the significant increase in capital arising from the disposal of Everyday Loans results in Group ROE reducing while this capital is re-deployed over time. 

In October 2016, the Group completed the move from AIM to the premium segment of the main market of the London Stock Exchange. Following the step up, after a very long and distinguished period as Chairman, Sir Henry Angest retired as Chairman and was succeeded by Lord Forsyth, an existing independent Non-Executive Director and a very experienced businessman and politician. Sir Henry Angest remains on the Board. Further strengthening and diversification of the Board was achieved in November by the appointment of two new independent Non-Executive Directors, Ann Berresford, a Chartered Accountant with a background in financial services and Victoria Stewart, a well-regarded fund manager.

Given the uncertain economic outlook, STB has continued to focus on growing its business in a prudent manner, in order to maximise shareholder value creation rather than solely focusing on balance sheet scale. To mitigate the potential that weaker economic conditions and higher inflation could potentially lead to future increases in impairments particularly in consumer finance, the Group has tightened credit underwriting standards and increased pricing in these areas during the final quarter. Despite this, net balances in Consumer and SME lending have continued to be successfully grown in line with the strategy to focus on short term Retail Finance, Motor Finance which provides security in the form of the vehicle financed and lower loan to value secured SME lending.

STB's cautious stance differs from a number of other lenders, particularly in the Unsecured Personal Loan ("UPL") market, where a significant proportion of loans are used to consolidate debt. On a number of previous occasions STB has expressed concern about the competitive dynamics in this market and the potential for risk to be mispriced. Recent data from the Bank of England has revealed that consumers are borrowing more than ever on UPL. Despite forecasts of slower economic growth, unemployment rising from an 11 year low and higher inflation, some lenders are now offering medium term UPL at record low interest rate margins. STB regards these dynamics as unsustainable and therefore, having reduced UPL lending in the first half of 2016, intends to cease originating new UPL assets at this juncture. STB has a large amount of experience in the UPL market, having been active since STB's formation in 1952, but at times has elected to reduce its exposure, for instance substantially reducing its UPL activity in 2006-08, in response to an unattractive competitor pricing environment at the time. STB intends to re-enter the UPL market once the risk adjusted yields available become more attractive. This decision is not expected to have a material impact on 2017 earnings.

In December 2016, all UK banks operating on the Standardised Approach to Capital were advised by the Bank of England that lending for residential development should be risk weighted at 150%. This represents a substantial increase on the 100% previously used by many of the smaller banks and will have an impact on capital requirements in the sector. STB will continue to lend to proven house builders, but believes it is well placed to manage the transition to this new higher capital requirement regime given the short duration of the loan book and STB's existing significant capital surplus. In addition, new lending is being priced based on the new higher capital requirement levels to achieve the Group's target RoE which should mean that the lower RoE back book is relatively quickly replaced by higher priced new originations. The fact that all of the competitors affected by the change will have to reprice their new lending if they wish to sustain their RoE means that STB is not at a competitive disadvantage albeit it does mean the cost of financing the building of houses will increase and there will be less capacity from small banks to lend to support house building in the UK.

The Basel Committee on Banking Supervision had intended to announce the outcome of its consultations in respect of the capital regimes this month. It now appears that it will be March 2017, at the earliest, before any clarification emerges. STB was awaiting the outcome of these deliberations prior to launching its residential owner occupied mortgage product. To avoid further delays the Group intends to launch its mortgage proposition during the first quarter of 2017. STB understands that a key sticking point relates to proposals to introduce a capital floor under the IRB approach used by the largest banks, with some pushing for a floor as high as 75% of the risk weights used under the standardised approach. Such an outcome would largely remove the substantial capital advantages enjoyed by the systemic banks in certain lending classes thereby creating a much more level competitive playing field. This would clearly bode well for smaller banks in the longer term.

Following the successful completion of a number of complex projects in 2016 including the divestment of the subprime unsecured personal loan business of Everyday Loans, the closure of the current account product and the step up from AIM to the main market, STB enters 2017 well placed to pursue its strategic priorities through developing its business model organically and pursuing M&A opportunities. This coupled with the main market premium listing and substantial capital resources, positions the Group well to navigate the evolving economic and regulatory environment and seek to take full advantage of any opportunities that may arise.

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About the Company:

Secure Trust Bank is an established, well-funded and capitalised UK retail bank with a 64 year trading track record. Secure Trust Bank operates principally from its head office in Solihull, West Midlands, and had 630 employees (full-time equivalent) as at 30 June 2016. The Group's diversified lending portfolio currently focuses on two sectors (i) Business Finance through its Real Estate Finance, Asset Finance and Commercial Finance divisions and (ii) Consumer Finance through its Personal Lending, Motor Finance and Retail Finance divisions.

As at 30 June 2016 the Group's loans and advances to customers totalled £1,128.3 million, customer deposits totalled £1,042.6 million and the Group's total customer base exceeded 600,000.