Secure Trust Bank takes a break from 'risky' personal loans

Secure Trust Bank issued a pre-close trading update on Friday, ahead of its annual results announcement 2016 calendar year, scheduled for 23 March.

The company described it as a year of “excellent progress”, ending with a “very busy and productive” final quarter.

It said trading in the final period of the year had been in line with management's expectations, and as a result STB now anticipates its 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%,” the company’s board said in a statement.

“As set out in our interim results, the significant increase in capital arising from the disposal of Everyday Loans results in Group ROE reducing while this capital is redeployed over time.”

In October, 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 period as chairman, Sir Henry Angest retired and was succeeded by Lord Forsyth, an existing independent non-executive director and an experienced businessman and politician.

“Sir Henry Angest remains on the board,” the directors confirmed.

“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 recently uncertain economic outlook, STB said ithas 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 lead to future increases in impairments particularly in consumer finance, the group has tightened credit underwriting standards and increased pricing in those 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 said its cautious stance differs from a number of other lenders, particularly in the unsecured personal loan market, where a significant proportion of loans are used to consolidate debt.

On a number of previous occasions STB had 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,” the board explained.

“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.”

The company said it 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.”

The board said that following the successful completion of a number of 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 was entering 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.”