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Secure Trust Bank

Project Fusion And Consumer Lending Focus Will Improve Future Operational Efficiency

AN
Consensus Narrative from 3 Analysts
Published
16 Mar 25
Updated
26 Mar 25
Share
AnalystConsensusTarget's Fair Value
UK£15.54
61.7% undervalued intrinsic discount
26 Mar
UK£5.96
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1Y
-10.8%
7D
2.8%

Author's Valuation

UK£15.5

61.7% undervalued intrinsic discount

Analyst Price Target Fair Value

Key Takeaways

  • Growth in net lending and cost savings initiatives are expected to boost future revenue and improve net margins.
  • Strong consumer lending focus and cost optimization efforts aim to enhance net interest margin and improve cost-to-income ratio.
  • Legal and regulatory challenges, elevated risk costs, and competitive pressures in vehicle finance could hinder Secure Trust Bank's margins, growth, and financial stability.

Catalysts

About Secure Trust Bank
    Provides banking and financial products and services in the United Kingdom.
What are the underlying business or industry changes driving this perspective?
  • The company is projecting significant growth in net lending, planning to expand its net loan book towards a £4 billion target, supporting future revenue growth.
  • Secure Trust Bank is committed to operational efficiencies, shown by the £8 million annualized cost savings targeted by the end of 2025, likely impacting earnings positively by reducing the cost base and improving net margins.
  • The company's strong focus on the consumer lending segment, which now represents 53% of total lending, is expected to maintain or slightly improve the net interest margin due to its higher yield compared to other segments.
  • The optimization of cost structures through Project Fusion and organizational redesigns indicates an improved cost-to-income ratio, setting ambitious targets of 44% to 46%, which would enhance net margins.
  • Legal and regulatory resolutions in the vehicle finance sector could reduce risk costs, normalizing the cost of risk, and thus positively impacting future earnings stability and return on equity.

Secure Trust Bank Earnings and Revenue Growth

Secure Trust Bank Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Secure Trust Bank's revenue will grow by 22.8% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 13.9% today to 26.2% in 3 years time.
  • Analysts expect earnings to reach £69.0 million (and earnings per share of £3.57) by about March 2028, up from £19.7 million today. The analysts are largely in agreement about this estimate.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.4x on those 2028 earnings, down from 5.7x today. This future PE is lower than the current PE for the GB Banks industry at 8.3x.
  • Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Secure Trust Bank Future Earnings Per Share Growth

Secure Trust Bank Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • The vehicle finance business faces ongoing legal and regulatory challenges, including issues arising from paused collections and historical commission disputes, which could lead to increased costs and impact net margins and profitability.
  • Elevated costs of risk in the vehicle finance sector, primarily due to the BifD review, have resulted in a higher-than-expected impairment charge, affecting net margins and returns on equity.
  • The competitive landscape remains challenging, particularly in retail finance, where market share gains are countered by consumer confidence uncertainty, potentially impacting future revenue and earnings growth.
  • The strategic shift required in the vehicle finance division, focusing on higher returning segments, may take time to implement fully, affecting short-term revenue and net margins.
  • Capital headroom constraints, amid uncertainty surrounding the financial impact of vehicle finance commissions, could limit growth and affect the bank's ability to absorb potential downside risks, impacting financial stability and future earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of £15.543 for Secure Trust Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £17.43, and the most bearish reporting a price target of just £14.2.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £263.0 million, earnings will come to £69.0 million, and it would be trading on a PE ratio of 5.4x, assuming you use a discount rate of 7.9%.
  • Given the current share price of £5.9, the analyst price target of £15.54 is 62.0% higher.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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