As names go, Secure Trust Bank is a hard one to beat for a banking organisation.
It is not, however, a household name, but given the current reputation of the best-known UK banks, maybe that is no bad thing for a company happy to take on the role of “challenger bank” - a term coined in the wake of the UK’s government’s stated desire to make it easier for new entrants to shake up the banking scene.
Of course, we’ve had “challenger banks” before, most notably in the days when almost every building society in the land was giving up its mutual status and pledging to give the big four banks a serious run for their money.
The only “serious run" that resulted was the well-publicised one suffered by Northern Rock, which came a cropper in the credit crunch through its over-reliance on the wholesale money markets.
Secure Trust (LON:STB) has little in common with Northern Rock, aside from having a long history and being a retail bank, as it is entirely funded by customer deposits and has no exposure to wholesale funding.
Although it only floated in November 2011, the company has been around since 1954. From 1985 the company was part of the Arbuthnot Banking Group, but Arbuthnot took the decision to sell off a chunk of Secure Trust and plough the proceeds into Arbuthnot Latham, its private bank.
Arbuthnot still owns 53% of Secure Trust but Lynam believes that should institutions start clamouring for more shares in the company, Arbuthnot is unlikely to stand in its way, but he says “they are in no hurry to sell; they’ve had a good run."
You can say that again. Having floated at 720p, less than three years later the shares are trading at around 2,260p, giving the AIM-listed company a market value of just over £400mln.
The bank chiefly operates in three areas: retail finance (for big ticket items in shops); motor finance; and personal secured loans.
To those three, you should soon be able to add small-to-medium enterprise (SME) finance, which is the area in which chief executive Paul Lynam cut its teeth.
The company raised around £49mln in June through a placing of shares and when asked by Proactive Investors how the company intends to spend the money, Lynam was quick to stress “the money won’t be spent; it will be invested”.
The company has identified opportunities to compete in the invoice finance market and to up its SME lending activities, predominantly through real estate finance.
“These are big, big markets,” Lynam notes.
However, Secure Trust is not interested in size for the sake of it.
“Our focus is not on scale; our focus is on control and profitability,” Lynam asserts. “A business cannot survive if it is not profitable.”
That last statement suggests Lynam is unaware of the “too big to fail” phenomenon that has saved many an unprofitable bank but it is a reassuringly old-fashioned assertion from a banker who has been in the business since 1988.
Entering new markets is always a risk, but Secure Trust has decent form in this respect, as the motor finance business only kicked off in 2009 and from a standing start the loan book is now an impressive £128mln,
The company is profitable, and, refreshingly for a bank, its profit & loss statement is relatively easy to understand, being mercifully light on impairments, revaluations of the value of its own debt and all the other stuff that ensure results announcements from the Big Four banks run to hundreds of pages.
In the first half of this year profit before tax surged to £11.3mln from £6.2mln, and if the investment analyst community is to be believed full-year profits should rise to £30.4mln from £17.1mln in 2013.
The company also pays a dividend. Last year, it paid 62p a share, and the City scribblers have pencilled in a figure of 66.51p for this year, covered more than two times by projected earnings per share of 138.219p.
If the government wants the challenger banks to be different to the incumbents, then Secure Trust certainly fits the bill.
It is not doing anything revolutionary or ground-breaking; its success largely revolves around matching deposits against lending, performing many of the services the high street banks no longer seem interested in doing.
“We don’t do mortgages and we don’t do credit cards. We’re not competing with the banks’ core products, we’re offering a complementary service,” Lynam states.