Secure Trust Bank PLC (STB) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for taking the time to join us for our 2023 interim results presentation. I'll let you read this slide to explain the basis of reporting in today's presentation, references are made to statutory results, which reflects both continuing and discontinued operations as reported in our interim report for the 6 months ended 30th of June 2023. This slide shows the running order for today. I'll comment on our performance and strategic priorities before Rachel covers off the financial results. And then I'll come back to talk about the outlook at the end before we take questions. Let me present to the group's 2022 results at the end of March. I commented on the inflationary pressures that we're mounting for households and businesses. Inflation has been more persistent than expected, and the [ Monetary ] Policy Committee has continued to take action. with latest rate rise last week taking bank base rate to 5.25% for the first time in 15 years. We are therefore operating in a higher interest rate environment than we expected or planned for. The market now expects rates to be nearing their peak, although clearly households and business are yet to feel the fully impact of those rate rises already made. As a result, we have continued to take a prudent approach to assessing customer affordability and remain focused on supporting our customers. We remain confident that the group's track record and resilience will continue to stand us in good stead. You would recall that we defined our new vision, purpose at our first Capital Market's Day almost 2 years ago. Our purpose to have more consumers and businesses to further ambitions has guided us in supporting our customers and business partners during these challenging times. We also articulated that the many opportunity that the group had to grow and [indiscernible] in our specialist lending businesses. Our growth has been executed effectively for 2.5 years now and in that time our lending balances have grown by 45%, that is just under GBP 1 billion of net new lending growth. We are well positioned to continue growing profitably. We have refocused the group and are benefiting from established positions in our markets. Despite the volatility of the recent times, we have been flexible and adapting to market conditions and we further opportunities grew strongly [indiscernible] large investable markets. As we explained in March, all of our deposit funding is from retail customers, 96% of those balances are made fully covered by the financial sales and compensation scheme. We have continued to grow our deposits are at record levels to support our lending ambitions We have a strong capital base that provides capacity for significant further lending growth. We issued [ GBP 90 million ] of fixed rate callable subordinated notes, which qualify as Tier 2 in February. We are well positioned to deliver an attractive return on capital as we continue to execute our growth strategy, scale the business in line with our medium-term target. Building on the momentum over the last 2 years, we have laid the foundations for a strong full year. Some key performance metrics for the first half are shown on the slide. Lending balances of GBP 3.2 billion were up by 14.8% in the last 12 months and up 8.2% since the end of 2022. Deposits from customers of GBP 2.6 billion were up 15.6% in the last 12 months and up 5.3% since the end of 2022. In the first 6 months we raised and retained over GBP 1 billion of deposits from customers. Our net interest margin reduced to 5.4% from 5.7% at the same point last year. We view this as a low point and net interest margin will increase again as the U curve flattens. We had [ expated ] [ CR ] reduction in the period as a proportion of little risk [indiscernible] lending [indiscernible] in our consumer businesses and due to the natural time lag in passing through rate increases to those businesses. Rachel will comment further on operating income growth and margin shortly. On a statutory basis our cost-income ratio of 56.9% was relatively flat compared to the first half of the last year. Rachel will show a more detailed slide explaining the underlying improvement in our cost/income ratio excluding nonrecurring costs. On the back of strong lending growth and cost management initiatives, our profit before tax and pre payment of GBP 39.3 was 14.6% higher for the first half of 2022. The Board has approved an interim dividend of GBP 0.16 per share in line with last year's interim dividend payment. Having delivered significant lending growth since the start of 2021 demonstrating our ability to capture the opportunities in each of our businesses, I'm confident that we will deliver a significant increase in profitability in the second half of the year. In this next phase of executing our strategy we need to be optimizing for growth and even more focused on what our strategic priorities are. Further growth of lending portfolios in these segments with the associated income increase, [indiscernible] continued simplification and streamlining of the group's operating model will further improve our cost efficiency. We have defined 3 strategic priorities for the group to simplify, enhance customer experience and leverage networks. Our technology capability is a key enabler for us, and we'll continue to strengthen our technology platform. By doing so, we remain well positioned to deliver market share gains and grow in our specialist lending segments and ultimately deliver on a return on equity target. We made significant progress against these key strategic priorities in the first half. We have completed the simplification of our business portfolio, and we're on track to close the operations of GMS fully. We've taken further action to digitalize and automate processes and have reduced the number of documents and letters we print and post to customers, and we've also renegotiated a number of contracts with suppliers and business partners. We've reduced our property footprint further, having [Audio Gap] already exited buildings in [ Rotherham ] and Cardiff in the second half of last year. In April, we closed one of our buildings in Solihull, consolidating into the other building, which has become a new head office. Our head office building has been refurbished to support hybrid and collaborative working and the further structural changes we made in the first half of the year to simplify our operating model. We've continued to focus on opportunities for cost removal and avoidance and are on track to deliver GBP 4 million of annualized savings by the end of the year. In customer experience, we've continued to evolve and improve the self-service options available to customers and our customer service is increasingly digital. Over 75% of our retail finance customers are registered for our online account management service, reducing the need for them to call us. Our open banking payment option continues to be well received by customers with a growing number electing to make [ fees ] payments to us by digital banking, rather than having to take the time to provide us with their payment card details. We are now operating our collections activity in vehicle finance on a single modern platform, removing complexity within the business. The platform has improved workflow management and automation. we launched the pilot of our mobile digital Buy Now Pay Later proposition AppToPay With a small number of existing retailers in quarter 2, delivering a solution that required no additional IT development by our retail partners? In vehicle finance, stock funding, we're now working with a broader range of [ auctioneers ] and dealers. And we're increasingly seeing the level of the key business growth in each of real estate [Audio Gap] finance and commercial finance. We'll continue to leverage our [Audio Gap] partner relationships and networks to originate new business to expand our product offerings and to take market share. Technology is a [Audio Gap] key enabler in delivering our growth efficiently. We've invested in our technology platform in recent years and will continue to do so. A number of enhancements are noted on the slide. This has allowed us to simplify the group and deliver better customer service by increasing digitalization, replacing legacy platforms and launching new products. We are able to integrate easily into our partners at sales, platforms and processes, allowing us to provide automated credit decisions and digital credit agreements. And this is one of the key reasons for our market share gain in retail finance. Our platform is scalable and has supported growth in our loan book of 45% and our deposit book of [ 33% ] in the last 2.5 years. and we have significant capacity to support our future growth ambitions. Let me just turn to the performance of each business unit. Some key data points are on the slide and more information is in the appendix to the presentation. 3 of our businesses grew lending strongly in the period. Retail finance lending balances grew by 12%. [Audio Gap] vehicle finances by 18% as a resUltraTech [Audio Gap] retail finance's market share grew to 12.9% and vehicle finances to 1.3%. The real estate finance balances grew by 10% [Audio Gap] and the loan to value on the portfolio now is at [ 56% ]. Commercial Finance [Audio Gap] lending balances dropped as we take a cautious approach to onboarding new clients in a challenging environment. There was an increase in the cost of risk [Audio Gap] in commercial finance due to us recognizing a loss on a long-running problem loan case. As you know, the team has a fantastic record in managing the portfolio exposures, including this loss on that 1 case in the first half, the cost of risk since launching the business in 2013 is 0.6%. Commercial Finance's net revenue margin and income grew strongly in the period as the lending portfolio is variable rate priced [Audio Gap] are linked to the bank base rate. Overall, the group delivered against our strategic priorities.

[Audio Gap] loss of GBP 7.2 million in Commercial Finance. Without this loss, continuing profit [Audio Gap] tax would have been [Audio Gap] [ GBP 23.7 ] million, a 38.6% increase on the same period last year. Net interest income in the first half of GBP 81 million is a 10.8% increase on the prior year, with a 16.3% increase in average lending being the key driver of this performance. The raising of new Tier 2 debt earlier in the year has impacted net interest income with an increased cost of GBP 3 million. However, this additional cost is outweighed by the increased capital it provides to support our growth and suite of medium-term targets. As David has already mentioned, we are operating in a higher interest rate environment than we had expected and planned for. And as previously indicated, while the base rate continues to rise, we suffer from [ a lag ] in passing through these rate increases in retail finance in particular. We have been proactive in merging the pass-through of rate increases to both lending and deposit customers, and have achieved a relatively neutral position in relation to NIM with a 10 basis point contraction. As I just mentioned, the increased Tier 2 in both the coupon cost and Quantum has reduced net interest income, and the impact on NIM is 20 basis points when comparing to last year. Overall, our NIM has contracted by 30 basis points to 5.4%. However, we expect this to be the low point for the year and NIM has already moved up to 5.5% on a July year-to-date basis. Furthermore, with the yield curve predicted to flatten by the end of the year, we should see margin expansion into 2024. On a statutory basis, operating costs were up GBP 4.5 million, and the cost/income ratio was largely flat on the same period last year. However, as we have reported in previous periods, there are a number of nonrecurring costs which distort the underlying performance in relation to operating costs. Excluding these nonrecurring costs, the cost/income ratio reduced by 1.7% to 54.8% period-on-period. One of the key drivers of meeting our medium-term target of a return on average equity in the mid-teens is by delivering growth in income whilst keeping cost growth lower, i.e., widening the doors. You can see from the waterfall on Slide 14, the impact of this widening of the doors delivered a reduction in the cost/income ratio of 5.1% from income growth. less the volume-related cost increase of 1.7%, a net reduction in cost/income ratio of 3.4%. We are living in a high and persistent inflationary environment, which manifest in pressure on salaries and other costs. The impact of this is an increase in the cost/income ratio of 2.6%. We continue to find opportunities for cost optimization through our Fusion project, and we delivered an additional GBP 0.8 million of savings in the first half. and are on track, as David said, for the GBP 4 million of annualized savings by the year end from this [ project]. Asset quality continues to be resilient within our consumer finance businesses. Retail finance has delivered sustained low levels of arrears as a result of the strategy to focus on higher-quality prime interest-free customers. Vehicle finance near prime arrears have reduced to levels similar to pre-pandemic and combined with [Audio Gap] prime segment, arrears levels have significantly reduced in the half. As the proportion of prime growth, this trend will continue. Cost of risk for the first half of 2023 at 1.5% was slightly[Audio Gap] elevated as a result of a GBP 7.2 million loss on a long running problem debt case in Commercial Finance. The circumstances around this particular case were unique with the lessons learned exercise, confirming no similar concerns across that portfolio. As David mentioned earlier, the track record of commercial finance since its inception, including this loss is only 60 basis points. On a more positive note, as indicated at the 2022 year-end presentation, vehicle finance cost of risk [Audio Gap] reduced significantly to 2.4% from a high of 8% in the first half of 2022. This is a result of the credit tightening actions taken throughout 2022, now being reflected in the IFRS 9 model output. We expect the cost of risk to settle into a range of 3% to 4% in the next few years, but it is dependent on the mix of prime and near-prime lending. Impairment provisions increased by GBP 1.5 million in the first half. If I can point you to the waterfall on Slide 16 for some further detail. The impact of growth in net lending increased provisions by GBP 11.6 million. This was offset by a release of GBP 3.2 million from improving macroeconomic assumptions and other movements of GBP 6.9 million. We do continue to retain a management overlay of GBP 2.8 million for affordability due to the current economic climate. Coverage ratio decreased marginally to 2.5% and still remain prudent. At a summary level, the balance sheet grew with total assets increasing by 5.1%, driven by an increase in loans and advances to customers of 8.2%. Loan-to-deposit ratio increased by 3.1% as we funded loan growth from surface liquidity held at December '22 for the business finance pipeline. Tangible book value per share increased by 2% to GBP [ 17.46]. We continue to deliver strong momentum in customer lending in the first half from established positions in our specialist lending market. Net loans and advances increased by 8.2% in the first 6 months of the year. with strong growth being delivered in both our Consumer divisions and real estate finance as a result of leveraging current and new distribution channels and products. Retail Finance grew 11.9%, vehicle finance by 18% and real estate finance by 9.5%. Commercial Finance did see a contraction in lending balances [Audio Gap] of GBP 60 million, reflecting seasonality and a cautious approach to new [Audio Gap] clients in a challenging economic environment. We are a diversified business and have proven our ability to be flexible in adapting to oil market conditions, and we see further opportunities to grow strongly [Audio Gap] lending market. Aligned with our growth strategy, we have consumed capital in the first half to fund this growth. CET 1 [Audio Gap] ratio reduced by 1% to 13% through a [Audio Gap] combination of capital generation from profits net of dividend, the unwinding of our IFRS 9 transitional relief and growth in lending and associated RWAs. We issued [Audio Gap] GBP 90 million of new Tier 2 to support growth and efficiency in the capital stack in the period, and we redeemed the existing GBP 50 million Tier 2 within 2023 call date. This additional Tier 2 provides us with sufficient capital for our planned growth, and we will [Audio Gap] have no requirement to go back to the market to raise any further until the call dates in 2028. Our capital rate ratios remained significantly above the regulatory minimums. Total funding increased by 6.2% [Audio Gap] growth in lending. Retail deposits grew by [Audio Gap] 5.3% in the period mainly through growth in access and [ ISA ] products. And to remind you, around 96% of these are fully protected by the FSCS. Our full range of products enabled us to actively manage shift in customer behavior away from shorter-dated and cheaper noticed accounts to the longer-dated and more expenses fixed-term accounts. [Audio Gap] increasing our levels in access accounts. Cost of funds is, of course, impacted by the increases in base rate, and we continue to actively manage pass-through of these increases to both deposit and lending customers. Lastly, [Audio Gap] all regulatory metrics remained strong and significantly in excess of regulatory [ minimums]. Let me now hand back to David to take you through the strategy [Audio Gap] looks like.

Thank you, Rachel.[Audio Gap] specialist lending business and a diversified and resilient model remains a key strength. We have proven our [Audio Gap] sales to be flexible and disciplined in helping customers and managing our loan portfolios. With a growth business with further opportunities ahead of us, and we have strong capital and liquidity positions to help us to continue to capture those opportunities. Having defined our optimizing for growth strategic priorities, we will remain laser focused on driving continuous improvement and leveraging technology to achieve our growth ambitions. And with a growing balance sheet, we expect a significant increase in profitability in the second half of the year. We will be holding a Capital Markets event on Wednesday, 8th November. The event will have 2 objectives. Firstly, to set out clearly the path for delivery of the medium-term targets; and secondly, to allow the V12 vehicle finance team to outline the strengths, capabilities and further opportunities for that business. We will, of course, send out invitations well ahead of time. We've made significant strategic progress and demonstrated our ability to execute our strategy and grow. We are benefiting from the actions we've taken to simplify the group over the last 2 years after the technology investments we have made that allow us to deliver enhanced customer experiences, a broader range of products and to drive further efficiencies. As we continue to expand and leverage our distribution through networks, we are confident in delivering sustained growth in our chosen markets. Continuing to capture growth is key. Since the start of 2021, the team has grown lending balances by 45% and deposit balances by 13%. As a result, we are on track to deliver all our medium-term targets. We look forward to sharing more insights on the delivery of those targets at the Capital Markets event on the 8th of November. That brings the presentation to a close. I would be happy to see any questions you may have. Thank you.

Thank you, Sir. [Operator Instructions]. We will take our first question from Robert Sage from Peel Hunt.

I've got a couple [Audio Gap] questions. The first one, looking at the [Audio Gap] GBP 7.2 million one-off charge in Commercial Finance, I was wondering whether you [Audio Gap] you could comment more widely about the lumpiness of your exposure [Audio Gap] is within this particular portfolio? What perhaps the average balance [Audio Gap] size might be, whether or not there could be many other [Audio Gap] exposures of the same sort of materiality is the one that you provided against [Audio Gap] today. The second question, and I apologize if this is slightly remedial in nature, is that there is about a GBP 15.4 million

[Audio Gap] seems to have gone up quite a lot [Audio Gap] in the half. Especially, Well I guess [Audio Gap] I think it went from GBP 30 million to GBP 17 million and then back up to [Audio Gap] quite a bit higher. So just wondering what is driving that stationary balance because it doesn't sound to me that you're seeing a material credit deterioration in your portfolio [Audio Gap] so I think in your presentation, you talked about Project Fusion delivering a GBP 4 million annualized by year-end. So just wondering -- so it sounds like there's still a step-up in cost savings in half 2. So if you could just[Audio Gap] give us a color on what's driving that, say, GBP 3 million of cost savings? That would be really helpful.

Thanks, Bernie. I'll probably pick up both of those. So the Stage 3 balances in commercial finance and rev [Audio Gap] and there is one case in there that has moved into Stage 3 from the period before December '22. But on [Audio Gap] there is stress in commercial finance in terms of the clients that we're dealing with. And we do get companies going [Audio Gap] 2 new companies that went into administration in the first half. [Audio Gap] One of those is already collected out in July, and the other one is practically collected out in July with no issues, so on full collection of those debts. So [Audio Gap] what's happening with the market that we are seeing companies that [Audio Gap] providing [Audio Gap] going into administration and therefore, we're having to collect [Audio Gap]

So are there any types of business of particular industries you're looking to reduce exposure to?

Okay. Thanks, Alex. On the first question on market share within the [Audio Gap] Consumer Finance business. So that [Audio Gap] still when we have one of the [Audio Gap] second largest competitor in the market. So our expectation is in the sort of medium term, [Audio Gap] you'll be getting into [Audio Gap] percent in Retail Finance. On Vehicle Finance, secondhand finance at the point of sale. Clearly, it's a much broader market [Audio Gap] there expanded into the planning segments. So against that [Audio Gap] 1.3% level. You have been not found of doubling in the medium [Audio Gap] sail the boat having done the product expansion continues [Audio Gap] start to see continued market share growth. So you're probably in the 2% to 2.5% range in the medium term there. So both still [Audio Gap] on AppToPay, that's in what we've done as a pilot. This [Audio Gap] with 27 existing retailers across different market segments and sectors. Our key focus at this stage just making sure technology works, process works for our business partners as well as our end client, too early in this age to see at what point would you be comfortable or have enough earnings to either continue rolling out the proposition as is or whether you may need to make any adaptations. The one thing I think probably worth highlighting is we took a little bit longer to launch the pilot than we had expected. But that's because our [Audio Gap] key development team planned a solution [Audio Gap] before the Fusion benefit.

And -- so I'm just going to -- is that a sort of a is there any reason to expect any kind of different trend into the second half. And secondly [Audio Gap] on the one-off costs that you had, what were those? And is there anything also likely in the second half [Audio Gap]? On the -- that's the first question. I've got a follow-up on something else.

Yes. -- so in terms of first half versus second half [Audio Gap] the line costs, I wouldn't expect it to be materially different. Hopefully, we will be exiting such a high inflationary environment [Audio Gap] then we should be seeing a better run rate into 2024 [Audio Gap]-- That was all I just wanted to point out. [Audio Gap] 32 the third and sixth columns, which are negative. that is fine.

We will now take our next question from Gary Greenwood from Shore Capital.

I've got 2, please. First one was on Vehicle Finance. I noted one of your peers recently stated they've seen an increase in [ frivolous] claims, which could cost them a little bit of money. I was wondering if you've seen anything similar within your vehicle finance business? And then the second question was just on dividend policy, obviously, you held the dividend in the first half of the year? I think you said you're still looking at [Audio Gap] the 25% payout. I was just wondering if you consider reviewing that dividend policy either to put a progressive overlaying [Audio Gap] place for alternatively cut the dividend altogether and buy back stock given where the rating is?

-- and then the second question was just on dividend policy. -- you held the dividend in the first half of the year. I think you said you're still looking at the 25% payout. I was just wondering if you consider reviewing that dividend policy either to put a progressive overlay in place alternative we cut the dividend altogether and buy back stock, given where the rating is Yes. Thanks, Gary. On the first question on vehicle finance, claims. So listen, we've seen an uptick, but from a very low level. So actually, it's relatively material to the cost of handling those claims. So nothing to call out specifically. And nothing would we just have to call out as a significant item. So it's already all in our operating cost line. On the dividend policy, yes, you're right. It's been held at 16, broadly the in line with the policy, listen, I think despite the fact that the state profit has reduced slightly. I think you can take it as a sign of our confidence in the full year. We have not, at this stage, made any decision clearly to change the dividend policy. But we've certainly heard and sat back and discuss with our board that some holders would have an expectation of some type of overlay or some progressive nature being built into the policy the next time aside -- so nothing to no decision metathesis gain that certain we've been listening to the feedback we found. That's great. Thank you very much. Thank you. there are no further questions in the phone Q. I'll hand it over to Scott for any eventual web questions that you got. Thanks very much for that. We currently got no questions from the webcast today. So David, I hand back to you for closing remarks. Okay. Thank you, Scott. Well, listen, thanks, everyone, again for joining. Listen, I think we've demonstrated again the ability of the teams to capture the growth we still have relatively low market shares and probably bar vital finance at 12.9% in very large niche markets. So we remain very confident, looking very much forward to the same half of the year. seeing a step-up in the level of profitability that we're delivering. And we're looking forward to being able to describe and talk you through on the eighth of November at the Capital Markets Day the trajectory in the past and what needs to happen. -- for us to consistently deliver the medium-term targets and deliver the mid-teens returns that we've indicated within those. And it will also be an opportunity for the broader retail finance management team you have visibility and to hear more about the strengths, capabilities and further opportunities to gain market share in that business. So thank you.