Secure Trust Bank PLC (STB) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Secure Trust Bank Interim Results Presentation. The presentation will commence shortly. [Operator Instructions]. Please note, this call is being live streamed to a webcast for a wider audience and will be recorded. I would now like to hand over to Ian Corfield, Chief Executive Officer, to open the presentation. Please go ahead.

Good morning, everyone, and thank you for joining us. There's a slide on a reporting basis in the pack, but for the avoidance of doubt, unless otherwise flagged, Rachel and I will be commenting on continuing adjusted numbers and metrics. During the presentation, the 2 of us will cover key strategic and financial highlights, along with the outlook for the balance of the year before taking your questions. The first half of 2026 has been an important period for Secure Trust Bank. We've delivered strong financial performance, completed the exit from vehicle finance, continued to make progress against our cost management program and maintained lending momentum across retail finance and business finance. Most importantly, the business is doing what we said it would do. We're executing against the strategic plan we set out, and the results today demonstrate that we remain firmly on track for our 2026 guidance and our medium-term targets. Before Rachel takes you through the financial detail, I want to focus on why we believe Secure Trust Bank represents an increasingly attractive investment proposition and how the progress we are making translates into future returns for shareholders. In short, targeted growth for higher returns. There are 5 specifics that underpin the investment case for Secure Trust Bank. First, 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 all substantial. 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 cost-to-income ratio to between 35% and 40% in the medium term. Thirdly, growth and cost efficiencies together create a clear pathway to higher returns. This isn't dependent on one transformational initiative. It's the cumulative impact of multiple actions that are already underway. As Rachel will demonstrate, our cost program is already gaining real traction. 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 portfolio quality and disciplined underwriting. And finally, we are well capitalized. That gives us flexibility both to support growth and to increase shareholder distributions with our GBP 10 million buyback program already underway. These strengths have been further enhanced by our performance and actions in the first half. Growth, profitability and return on required equity are all consistent with guidance. The vehicle finance exit is now complete. This has 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. The investments we've made in product development are beginning to generate tangible results. We've launched new products, entered new partnerships and broadened distribution channels across the group. 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 group has been materially simplified, and we operate 3 complementary businesses. Retail finance provides point-of-sale finance solutions through long-standing relationship partners and serves around 1.3 million customers. Business finance provides specialist secured lending to U.K. SMEs and property investors. And our savings franchise provides a stable and scalable funding base with more than GBP 3 billion of customer deposits. Each business 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 though, is how these businesses work together. They create a diversified earning profile, funding stability and multiple opportunities for disciplined growth. Our strategy also remains straightforward. We're focusing on driving targeted growth for higher returns through 3 priorities. The first is product expansion. We've added products, capabilities and distribution channels where we see attractive risk-adjusted returns. The second is digital capability. Better technology improves the customer experience, increases efficiency and strengthens scalability. And the third is 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%. Investors sometimes ask what gives us 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 4 key drivers. Firstly, continuing business growth at around 10% annually. That's in line with the group's historic growth rates. Secondly, maintaining risk-adjusted margins through disciplined pricing and underwriting. -- thirdly, keeping a risk-weighted asset mix consistent with today; and fourthly, leveraging our operating platform so that costs grow much more slowly than revenues. We've already made meaningful progress. Our return on required equity in the first half was 14.5% and reflects a business 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. Our first half performance followed this trajectory to higher returns. Customer lending increased to GBP 3.5 billion, reflecting continued growth in both Retail Finance and Business Finance. Adjusted profit before tax increased by 9.4% to GBP 31.3 million. Risk-adjusted margins remained stable and cost of risk improved. Our CET1 ratio increased to 14.3%, providing substantial capital flexibility while remaining comfortably above our 13% ambition. 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 is the combination of outcomes we want to deliver. I'd now like to turn to how our strategy is being translated into actions. 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 broadened its distribution by launching our first aggregator partnership via the #1 player, Hargreaves Lansdown. On digital delivery, customer adoption of our V12 app continues to increase, now at over 660,000 users. Our bridging portal is live, and we are simplifying our technology architecture to improve both efficiency and scalability. And on capital discipline, we've completed the first tranche of the buyback program while taking actions that deliver approximately GBP 15 million of annualized run rate savings. The common theme across all 3 areas is execution. Rather than focusing on aspirations or intentions, the business is demonstrating measurable progress. That's the excitement for us, moving the company from strategy into delivery. The first half has shown that we can make that shift, and I'll return later on to our priorities in H2. I'm now delighted to hand over to Rachel to review our financial performance in more detail.

Thank you, Ian. I'll now take you through the financial performance for the first half of 2026. Overall, this was a strong first half with profit growth, continued balance sheet expansion, lower credit losses and a significantly strengthened capital position following the completion of the vehicle finance exit. These results leave us firmly on track to deliver our 2026 guidance and demonstrate clear progress towards our medium-term targets. Starting with the income statement. Adjusted profit before tax increased by 9.4% to GBP 31.3 million. That was mainly driven by a 7% growth in average lending balances, while risk-adjusted margins held steady at 4.2% -- adjusted operating expenses increased by 8.8% to GBP 39.5 million. This reflects the transitional impact of reallocating centrally managed costs following the vehicle finance exit, together with selective investment in growth initiatives. Importantly, the vehicle finance exit delivered GBP 5.5 million of cost savings in the first half. Credit performance remained strong. The impairment charge was broadly stable at GBP 14.7 million across a larger lending portfolio, reducing the cost of risk by 10 basis points to 0.9%. Adjusted return on required equity increased by 60 basis points to 14.5%. This measure normalizes equity to the group's 13% CET1 medium-term ambition and therefore, removes the distorting effect of surplus capital. Adjusted return on average equity was 13.1%, 110 basis points lower year-on-year, principally because average reported equity was higher following capital generation and the vehicle finance exit. Total earnings per share increased to 126.4p compared with 87.6p in the prior period. And on a statutory basis, total profit before tax increased by 40.8% to GBP 31.4 million, helped by the vehicle finance disposal gain. Turning to margin. Group net interest margin remained stable at 4.7% despite the low interest rate environment, and this reflects active management of both asset pricing and funding costs. Within Retail Finance, NIM did reduce by 30 basis points to 6.7%. This primarily reflected the repricing of retained higher volume retailer contracts and the flatter yield curve. Those pricing decisions were deliberate and considered within our overall approach to growth, risk and returns. Business Finance NIM improved by 40 basis points to 2.9%, benefiting from repricing of past due loans and early repayment charges. However, net revenue margin increased only by 10 basis points to 3.3% as lower fee income partly offset the improvement in NIM. At a group level, gross yield reduced from 9.6% to 9.0%, while the cost of funds improved from 4.9% to 4.2%. The broadly matched movement demonstrates disciplined repricing across assets and liabilities. The key point is that the diversified business mix and active balance sheet management enabled us to protect group NIM and maintain risk-adjusted margin at 4.2%. On costs, adjusted operating expenses increased by 8.8% to GBP 39.5 million. However, that movement should be viewed in the context of the vehicle finance exit and the transition to a simpler operating model. Following the exit, some centrally managed previously allocated to vehicle finance are now borne by the continuing businesses. We have also invested GBP 0.4 million in product expansion initiatives, primarily through recruitment of specialist capability. As mentioned, the vehicle finance exit did deliver GBP 5.5 million of cost savings in the first half. The adjusted cost/income ratio increased by 100 basis points to 46.5%, which is consistent with our guidance of approximately 47% for 2026. I'll provide some further details on our cost program on the next slide. Following the vehicle finance exit, we identified a GBP 25 million cost reduction opportunity to be delivered by 2028, measured against that business' annual run rate cost base of approximately GBP 30 million. Actions completed by the 1st of July are expected to deliver approximately GBP 15 million of annualized run rate savings, representing 60% of the target. We recognized a GBP 5.5 million of savings in the first half, and we expect approximately GBP 13.5 million to be recognized across the full year 2026. Total costs to achieve the program are expected to be approximately GBP 17 million. Of this, GBP 5 million were incurred in 2025 and a further GBP 1.8 million is expected -- GBP 12 million is expected between 2026 and 2028. Within that GBP 12 million, GBP 1.8 million was incurred in the first half of 2026. The program remains a central component of our route to improve operating leverage and our medium-term ambitions. The remaining work includes further simplification and efficiency actions, and we remain on track to deliver the GBP 25 million target by 2028. On credit, the headline is encouraging. Cost of risk reduced by 10 basis points to 0.9% with resilient performance across both our principal lending businesses. Retail finance cost of risk remained stable at 1.4%, reflecting resilient customer performance and continued high-quality origination. Business finance cost of risk improved by 10 basis points to 0.5%, reflecting improved asset quality and lower Stage 3 provisions. The business finance impairment charge was primarily attributable to one legacy case and provision coverage increased modestly to 1.5%. This reflects prudent provisioning for that case as well as a more cautious macroeconomic outlook. Our expected loss scenario ratings were unchanged from December 2025, although peak unemployment assumptions increased and house price assumptions were weakened, resulting in an additional GBP 1.7 million of IFRS 9 provisions in the period. Overall, portfolio performance remains supportive of stable risk-adjusted margins, while our provisioning reflects the more cautious macroeconomic assumptions. Moving to the balance sheet. Total assets reduced to GBP 3.95 billion. That mainly reflects the completion of the vehicle finance exit and the normalization of the elevated cash balances we had at year-end. We used surplus liquidity to purchase GBP 100 million of [gilts], maintaining a high-quality liquid asset portfolio to support balance sheet resilience. Customer deposits reduced by 7.9% to GBP 3.23 billion, reflecting the lower funding requirement after the disposal rather than a constraint on access to retail funding. The loan-to-deposit ratio increased to 107% from 105% at year-end. Shareholder equity increased by 4% to GBP 389.1 million. And importantly, tangible book value per share increased by 3.6% to GBP 20.45p. On to lending growth. Continuing loans and advances increased by 4.9% to GBP 3.5 billion with growth across both retail and business finance. Retail finance was supported by the established national retail partnerships and newer product initiatives. Business Finance benefited from strong activity in residential investment and continued development of the bridging proposition. Portfolio mix remained stable with business finance representing 56% of lending and retail finance at 44% -- the group's CET1 ratio increased by 148 basis points from 12.9% to 14.3%. The gain on sale and release of vehicle finance risk-weighted assets contributed approximately 148 basis points, while maintaining vehicle finance servicing operations to the point of migration consumed 30 basis points of capital. The continuing businesses were capital generative during the period and the interim dividend and the initial GBP 5 million share buyback tranche together returned approximately 30 basis points of capital to shareholders. The first GBP 5 million share buyback tranche is now complete and reduced shares in issue by approximately 323,000 and the second GBP 5 million tranche will launch in September and is expected to reduce CET1 by approximately 20 basis points. At 14.3% CET1, this is 130 basis points above our medium-term ambition of 13%. Total capital was at 16.6% and the leverage ratio at 10.3%. The group, therefore, remains capitalized to support continuing growth and shareholder distributions. The strategic sequence is clear. The vehicle finance exit released capital and reduce risk. The continuing businesses are generating capital, and we are allocating capacity between attractive growth opportunities and shareholder returns within our capital framework. Customer deposits accounted for 92.1% of total funding, underscoring the strength of our retail funding model and the deposit mix remained broadly stable with term deposits representing 80% of deposits and access deposits representing 20%. FSCS coverage remained high at 97.6%. Liquidity is also strong with an average liquidity coverage ratio of 208.6%, and our savings franchise continues to give us funding flexibility for planned growth. New products, automation and wider distribution, including the deposit aggregator partnership launched in July, further strengthens that capability. Finally, our full year 2026 guidance is unchanged. We still expect net lending growth of 8% to 10%, around 10 basis point improvement in our risk-adjusted margin, a cost/income ratio of around 47% and a CET1 ratio of approximately 13.5%. The first half gives us a solid base for delivery. Lending growth is progressing. NIM is stable. Credit performance has improved. Cost actions are in place and capital remains strong. So our focus remains the same: targeted growth, stable risk-adjusted margins, better cost efficiency and disciplined capital allocation. Together, these support our ambition to deliver return on average equity of more than 16% by 2028. Thank you. And I will now hand back to Ian, who will cover the outlook.

Thanks, Rachel. Now we've covered the first half performance. I'll turn to our outlook for the remainder of the year. The key message is straightforward. We remain on track for our 2026 guidance and continue to see a clear pathway towards our medium-term targets. Equally, as we move into the second half, our priorities are clear. First, we will continue to grow through both existing and newly launched products. Secondly, we will deliver the next phase of our cost program and technology simplification agenda. And third, we will complete the remaining GBP 5 million tranche of the buyback program from September onwards. While the macroeconomic outlook remains uncertain, we believe Secure Trust Bank is well positioned. 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 proven resilient through different economic cycles, and we believe we are well placed to benefit from any stability or improvement in the broader environment. So let me close 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. We're reducing costs and increasing efficiency. Credit performance remains resilient, and we have the capital strength to both support growth and increase returns to shareholders. While there remains work to do in ensuring delivery in an unstable macro environment, 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. Thank you for your continued support. And I'll now hand over for your questions.

We will now begin the Q and A Session.[Operator Instructions]. We'll take our first question from Gary Greenwood of Shore Capital.

Hi thanks for taking my questions. I've got 3, if I can. So the first one was on costs. I think you've indicated you'll get to sort of GBP 13.5 million this year. I think the original plan was to be at GBP 10 million this year. So is that you executing faster? Or is it you executing more than you previously expected? And then also, why aren't you upgrading your guidance given costs ahead? Or are you just being sort of conservative at this part of the year? So that's the first one. Second one was just on the retail finance repricing that you mentioned impacted on NIM. If you could just elaborate a little bit on what's going on there? And then the third one was on deposits. Obviously, you were sort of out of the market in the first half of the year as you sold the vehicle finance business. I'm guessing deposits will start to grow again now. So just maybe talk a little bit about that in the context of what seems to be quite a competitive market at the moment and how you navigate that. Thanks.

Thanks, Gary. I appreciate the questions. I think what I'll do is I'll let Rachel address the NIM question in a second. I'll deal with cost and then come on to reflect on deposits. I think just in terms of cost, to answer your question directly, this is us executing faster. We now have a bottom-up plan essentially that addresses the GBP 25 million. So we're clear where that's going to come from over the course of this year into '27 and a little bit in 2028. We're getting there at a pace that was ahead of our initial projections. But the reason we're not upgrading our guidance in that respect is that ultimately, we're now moving into the phase of that cost reduction program that gets a bit trickier. We've obviously closed a part of the business and the people who were running that business have left, and we've started to exit a number of technology platforms. But the simplification across the broader business, which we are now focused on, will, of course, be more challenging by its nature because it relies on technology deployment into different parts of the business. That doesn't mean we're not confident in delivering it. We are. And I think you can see the progress that we've made in getting to a GBP 15.5 million run rate already. But as I say, the reason we're not upgrading that guidance is we think we can get there more rapidly, but ultimately, delivering that full GBP 25 million is still our goal. So hopefully, that addresses your question. We remain confident in that cost program, but we know we've got more wood to chop as we get into the second half and then into 2027. Rachel, do you want to just reflect on margins? Yes.

So Gary, there's probably 2 parts to that -- to the answer on retail NIM. One is the yield curve as it's come down in terms of Bank of England rate, then that does have a timing lag with the furniture and now home improvements having sort of a back book that takes a while to actually execute in terms of pipeline. The second part is there is competition out there, and we are trying to ensure that our major retailers that we take more of a share from them. That involves us having to look at our pricing. It's a competitive environment, but we believe that the returns that we get even at that slightly lower margin is still a very good return in terms of that business. So we're happy to make those decisions to retain those large retailers at sometimes a little bit tighter margins than we might have seen in the past.

Thanks, Rachel. And Gary, just in terms of deposits, again, you're right, we definitely benefited in the first half, particularly the first quarter from the funds that we got from the sale of vehicle finance. Obviously, that meant that we had less of a liquidity requirement during that period of time. That said, we are still a relatively small player in the GBP 2 trillion market. And what we're finding is that whilst obviously, the macro remains unstable and there are periods of time where swap rates are well advanced relative to the Bank of England rate, we are still finding opportunities to go into the market and to be booking liquidity at the sort of margins we want to see it in. And certainly, there is no challenge in terms of the overall availability of liquidity. I guess, though, that's also why we continue to be focused on expanding both our product range and our distribution for our deposits franchise. I think moving on to Hargreaves Lansdown is one step forward. But of course, there are a number of other aggregators that will now be focused on as other sources of distribution. And we've continued to expand our product set in the first half as well. So look, it's an unstable macro, as you know, but I remain confident in our ability both to attract funds and to come in and out of the market in timing that reflects the sort of margins we want to be booking at.

Thank you very much.