Secure Trust Bank PLC

LSE:STB

Q2-2025 Earnings Call

[David McCreadie, executive]

[Audio Gap]

margin management, our adjusted profit before tax of GBP 23.3 million was 36.3% higher than for the first half of last year. Our return on average equity, as mentioned earlier, improved to 9.6% and the return, excluding vehicle finance was 13.7%. The Board has approved an interim dividend of 11.8p per share, in line with our progressive dividend policy. We continue to show positive progress towards achieving our current medium-term targets. The bar chart show the progress on each of these recent years, including the year-on-year comparison for the first half. The first chart demonstrates the progression of skilling our lending businesses towards a GBP 4 billion ambition, which is now achievable in the near term. As we simplify the group and focused on increasing the mix of lower risk consumer lending, we planned for our net interest margin to settle around 5.5%. It has remained stable over the last few years as we maintained our pricing discipline and at the half year, improved to 5.4% compared to the first half of last year, is a really strong performance considering the rate of lending growth we have delivered. I've already commented on the further improvement in our cost income ratio in the first half to 49.1%. And you can see the improvement over a longer period of time in the middle chart, the ratio having peaked just over 60% in 2021. As we continue our growth trajectory and maintain focus on minimizing cost growth, we remain extremely confident and deliver our target of 44% to 46% against a GBP 4 billion loan book. We will see further progression in return on average going forward, and this remains our key financial priority. We are confident we will deliver 14% to 16% returns in the near term.

We were capital accretive in the first half of the year. At 12.6%, our CET1 ratio remains comfortably ahead of our own target to remain above 12% and ahead of our minimum regulatory requirement of 9.6%. Rachel will share further detail on our capital ratios in a later slide. As shown on the bottom half of the slide, we are clear on how we unlock our current target for returns. That requires a GBP 4 billion loan book, stable cost of risk, mix and funding cost movements supporting the net interest margin and proactive management of our costs. The cost of risk was stable year-on-year for the first half, although higher than our through-the-cycle expectation. Rachel will comment further on that. Overall, based on the track record of recent years, we remain confident in continuing to grow and in delivering against our current target returns in the near term.

Now let me hand over to Rachel to go through the financial review section.

[Rachel Lawrence, executive]

Thanks, David, and good morning, everyone. I will start with a brief overview of the income statement on Slide 10. At a headline level, we have delivered 36.3% increase in adjusted profit before tax compared to the first half of 2024. As you've heard from David, we have made further progress towards achieving our GBP 4 billion net lending target with average net lending balances increasing by 10.3%, delivering very strong operating income momentum, up 10.6% in comparison to the first half of 2024. Cost discipline has always been a focus for us, and we've been effective in delivering year-on-year reductions in our cost income ratio. Operating costs in the first half of 2025 increased just 1.2% in comparison to the same period in 2024, demonstrating our ability to contain cost growth while continuing to grow the balance sheet. Cost of risk remained stable in the period at 1.7%. Retail Finance was impacted by nonrecurrence of one-off model enhancement benefits in the first half of 2024, and Vehicle Finance benefited from the reduction in the level of defaults and impairments as the impacts of [indiscernible] review abated. Net interest margin also improved to 5.4%, a 0.1% improvement on 2024 half year position and adjusted return on average equity improved by 2.3% to 9.6%. Statutory profit before tax at GBP 22.3 million was up 30.4% on the same period last year.

As I mentioned, group NIM improved by 0.1% to 5.4%. This improvement was delivered by Retail Finance NIM increasing to 7%, up 0.4% on half year 2024 due to the falling yield curve and contractual repricing lag. This, however, was offset by vehicle finance NIM decreasing to 9.2%, down 0.3% due to business mix on average net lending balances, and importantly, a 0.6% reduction in cost of funds as base rates reduced with the June exit rate at 4.7%.

We have contained our absolute cost growth to GBP 0.6 million in the period which, coupled with a GBP 10.2 million increase in operating income, drives an impressive 4.6 percentage point reduction in our cost-to-income ratio to 49.1%. As I've mentioned before, 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 [ jaws ]. As you can see from the chart on the right, we have continued to improve our jaws over the last year from 4.3 percentage points at half year 2024 to 9.4 percentage points at the half year 2025. Organizational changes in quarter 4 2024 delivered GBP 1.5 million of additional savings, and we are on track to reach our Project Fusion upgraded target of GBP 8 million by the end of year-end 2025.

Cost of risk remained stable in the period at 1.7%. Retail finance cost of risk at 1.4% represents a more normalized level than the 0.7% reported in the first half of 2024, which benefited from nonrecurring model enhancements. Vehicle Finance cost of risk at 5.6% fell considerably from the high of 8.8% in the first half of 2024, which was impacted by the elevated levels of defaults and impairments due to the BiFD review. There are 2 legacy cases in Real Estate Finance that resulted in a 0.2% increase in cost of risk. However, they are both close to resolution. Overall coverage ratios at 2.7% decreased by 0.3% on full year 2024, largely driven by the sale of GBP 25.8 million of Vehicle Finance legacy defaults offset by new business provisions of GBP 8.2 million and GBP 0.9 million due to worsening economic forecasts.

As I'm sure all of you are aware, the Supreme Court has ruled that the relationship between a motor dealer and a customer is not a fiduciary nature. [indiscernible] of a commission to a motor dealer is not deemed as a bribe. However, the Supreme Court did uphold that in the case of Johnson, the commission paid was unfair after considering the specific circumstances of that case. Although the Supreme Court provided some additional clarity, the scope and design of any potential redress and associated costs are yet to be fully provided by the FCA, which will be consulted on in October 2025 and finalized by the end of the year. We've continued to use probability-weighted scenario analysis using the new information from the Supreme Court and the FCA statement and have concluded that any changes to the provision are unlikely to be material.

At a summary level, the balance sheet grew with total assets increasing by 4.2% in comparison to the position at the end of 2024, driven mainly by an increase in loans and advances to customers of 6.1%. Deposits from customers have grown by 8.2% to fund growth and to replace TFSME funding. Linked to that wholesale funding decreased by 29.8% driven by the full repayment of [ TFSME ] which was partly replaced by a mixture of Bank of England, long-term repo funding and deposits from customers. Shareholder equity increased by 3.8% to GBP 374.1 million and tangible book value per share increased by 3.9% to GBP 19.7. Net lending grew by 6.1% to GBP 3.8 billion. Growth was delivered across 3 of our 4 divisions, with Retail Finance growing 5.8% in the half, as we continue to grow our market share up 1.7%, reflecting the continued growth in our key furniture and jewelry sectors and the seasonal season ticket loan sector. Real Estate Finance growth of 7.9% in the half, and this was focused on our residential investment product. Commercial Finance also grew by 10.7% in the half, reflecting strong new business in quarter 1. Vehicle Finance declined by 0.3%, reflecting the decision to cease lending into the prime product in early 2025. But overall, the mix of the portfolio remains balanced.

We were capital accretive in the first half with a CET1 ratio increasing to 12.6% with 60 basis points of capital generated from underlying retained earnings, offset by dividends and RWA growth of 30 basis points. Our capital ratios remained significantly above the regulatory minimums with headroom to support planned growth. Total funding increased by 4.3% in the half to support the growth in lending, with retail deposits growing 8.2% in the period, mainly through growth in our fixed term ISA products. We fully repaid TFSME following accelerated payments. And as mentioned earlier, this was funded by a combination of retail deposits and ILTR. All our regulatory metrics remain strong and significantly in excess of our regulatory minimums.

Profit before tax preimpairment in Retail and Vehicle Finance grew 23% and 39%, respectively, reflecting significant increases in average lending balances in both divisions, increased NIM in Retail and good cost control in both divisions. Impairments in consumer at a total level were materially flat half-on-half with an increase in Retail as a result of the nonrecurring IFRS 9 model changes in half 2024, not repeating. And in Vehicle Finance, a significant improvement in default rates and impairments and as the impacts of BiFD abated in 2025. Overall, Retail Finance delivered a 6.8% increase in PBT and Vehicle Finance reduced its loss from GBP 12.5 million in the first half of 2024 to GBP 4.5 million in the first half of 2025. In Real Estate Finance, operating income was relatively flat with the increase in average lending balances being delivered through lower-margin residential investment. Impairments were impacted by the 2 legacy cases, which are now close to resolution. PBT, therefore, reduced half-on-half by GBP 2 million, but mainly driven by those increased impairment charges. In Commercial Finance, PBT reduced half-on-half by GBP 1.4 million, mainly driven by a 3.3% reduction in average lending balances in the period. Central loss before tax was flat half-on-half.

We recently announced our decision to pivot away from Vehicle Finance and the group has since stopped new lending and put the existing book into runoff. This table highlights the half year 2025 results on a core basis, i.e., excluding Vehicle Finance. PBT would have increased to GBP 27.8 million, risk-adjusted margin would increase to 4.2%, cost-income ratio would improve to 46.5%. And importantly, return on average equity would be 13.7%. It is anticipated that more than GBP 25 million annual cost can be removed by 2030, of which approximately 65% delivered by 2027. The average loan length outstanding at 30th of June 2025 was 37 months and using contractual amortization and observed customer behaviors, we expect a 50% to 55% reduction in the book by the end of 2026. Capital will come available as the book reduces, and this will be redeployed to support growth in our core businesses.

Let me now hand back to David to take you through the strategic review and the outlook for the rest of the year.

[David McCreadie, executive]

Thank you, Rachel. As you know, we have a clear vision, purpose and strategy. We refreshed the articulation of our strategic priorities in [ 2023 ] as part of our Optimizing for Growth Strategic framework, and we remain focused on continuing to simplify the group and our operations, enhance the customer experience and leverage our [ decision ] networks, all enabled by our technology capabilities and platform. We have made further progress against those priorities and some examples are shown for each on the slides.

Our decision to move away from Vehicle Finance as part of our broader strategic refresh will allow us to simplify the group even further. This follows the organization redesign work implemented at the end of last year to consolidate all our IT operations and change teams under the group's Chief Operating Officer. Those changes supported a simpler and more cost-efficient structure and [ remove ] duplication. As a result, we are on track to deliver our GBP 8 million of annualized cost savings from Project Fusion, our cost optimization program by the end of this year. The sale of our [ former Head of the building in Solihull ] was also completed in March and further simplifying the property estate we occupy and manage. We see our digital platforms as a route to deliver improved customer experiences and further cost efficiencies. Our customers have continued to adopt a more digital-first approach. Just over 6 months since launch, more than 250,000 Retail Finance customers have ventured to manage their Retail Finance account on our app to be mobile servicing capability. [indiscernible] applications for a new Retail Finance loan were also a decision within 6 seconds, providing the necessary resilience and speed of decision required by our detailer partners. 98% of our Savings customers are registered to use online banking and now over 30% have registered for our mobile banking app. We've made it easier for Savings customers perform internal transfers and provide [ maturing ] instructions in online banking. By simplifying our processes, we reduce the need for manual intervention by a customer service team. 76% of all maturing savings term deposits were retained during the period.

In Business Finance, our commercial team was recognized again as the Asset-based Lender of the Year at The Real Deals Private Equity Awards, validation that we continue to deliver a positive experience for our client base. The group's success is built on the importance of strong relationships with business partners, and we've continued to develop those. In our core businesses, we work with retailers, football clubs, ticketing platforms, private equity groups, accountants and professional advisory firms. We saw an increase in our new business market share in Retail Finance, which grew to 17.3% as we continue to support over 1,000 partners. Our stock funding dealer relationships increased to 437 in the period. And as part of our runoff activities, we're now supporting those clients to find alternative funding arrangements. We've seen the level of repeat business and our Real Estate Finance business improved as clients increasingly recognize the benefits of our specialist relationship approach, and this supported a 7.9% increase in net lending in the first half.

And in Commercial Finance, we continue to support our existing clients and business introducers and what has been a challenging environment. After what was a quiet [ 18 months ] across 2020 and 2024, net lending increased by 10.7% in the first half. So further progress delivered across each of our strategic pillars.

This is my last set of results prior to retiring from the group, and so I want to briefly reflect and comment on what team has achieved during my tenure. We've transformed the group from what was previously a large number of very diverse [ Federated ] businesses. The changes we have implemented have resulted in us being a more focused specialist lender with a clear purpose to help more consumers and businesses to fill their ambitions. We've been more proactive in communicating our own ambitions to the market and have stuck to those commitments despite the volatile political and economic environment, the cost of living challenges and interest rates being much higher in recent years than we had initially expected. We have introduced significant changes to our operating model, centralizing IT, operations and change functions [ and that is like us to ] streamline activities, remove costs and prioritize more effectively. The team has delivered a significant improvement in cost efficiency as we have scaled our lending in a smaller number of businesses with our cost income ratio now at 49% from just over 60% in 2021 and moving towards our target range of 44% to 46%. Project Fusion and the focus of that program brought embedding a more cost-conscious culture was a key enabler. Our Optimizing for Growth Strategic priorities were defined, and these continue to guide our actions to simplify the group, enhance customer experiences and expand and leverage our distribution networks. The growth opportunities we have consistently highlighted for each of our Specialist Lending businesses has been captured by our specialist teams, how we're nearing our current GBP 4 billion net lending ambition, having grown by 62% since the end of 2020.

As shown in this morning's presentation, we're now delivering an improvement in returns and are positioned to deliver further sustainable improvements following our decision to stop new Lending and Vehicle Finance. Our tangible book value per share has increased by 32% since the end of 2020 to GBP 19.37. Despite continue to trade a significant discount, it is pleasing to see the share price start to recover following the rollercoaster -- economic, legal and regulatory uncertainty in these last 2 years.

With so much having already been achieved, what about the outlook for the group? Well, there are exciting opportunities ahead to drive even more ambitious outcomes. Our focus on growing net lending in our core businesses will continue in what our large addressable markets. As we're driving further operational efficiencies, now that a more cost-conscious culture is embedded. We've recently completed our group-wide strategy review with the first decision to pivot away from vehicle finance having been made announced and now being implemented. The runoff of that business, which continued to lose money in the first 6 months of this year will allow for GBP 25 million of costs to be removed and will support a further improvement in cost income ratio and enhance returns to be delivered. In the first half of this year, the core businesses, so excluding Vehicle Finance, delivered a cost income ratio of 46.5% and a return on average equity of 13.7%.

During our strategy review, we also identified and validated new growth opportunities within our high-returning Retail Finance, Commercial Finance and Real State Finance businesses. Detailed plans are now being refined to invest more in those businesses as capital is released from the reducing loan book in Vehicle Finance. With the further simplification of the group, the [ EFS ] strategy will enhance the groups of terms above the current 14% to 16% target range in the coming years. Through details of those [ growth funds and the group's -- ] additions for 2026 and beyond will be shared at the Capital Markets event during quarter 4 of this year by my successor, Ian Corfield and Rachel.

It's been a pleasure to partner with Rachel, [indiscernible] other executive colleagues and to receive such unwavering support colleagues across the group. I'd like to thank them all for that support. I wish Ian every success in role and look forward to him and the team leading the group to further success during the next chapter of the group's strategic development.

We'll now open up for questions.

[Operator]

[Operator Instructions] And the first question is from Alex Bowers from Berenberg.

[Alexander Bowers, analyst]

I just had a couple of questions, if I may. Just firstly, on net interest margin. You've iterated sort of above 5.5% target. I'm just interested to hear kind of what you think the evolution of NIM looks like as for the Vehicle Finance that winds down and you start to reallocate capital in some of the other parts of the business? That's my first question.

Secondly -- H1 cost growth 1% year-on-year. You're kind of guiding, I guess, to sort of 5% a year in the medium term. But I'd be [indiscernible] to understand what the kind of cost profile looks like over the next couple of years. I mean, should we expect it to kind of normalize back by 5%? Or was it sort of a gradual tick up towards that number?

And then just lastly on the sort of [ digital capability ] is interested to hear more about the [indiscernible] and the sort of [indiscernible] currently using it. Are there more customers that can be onboarded there? Or are there sort of potential automation or cost savings that come through from more people using that product just initially more at it?

[David McCreadie, executive]

Okay. Thanks for the questions, Alex. Actually, I'll take the last 1 first, and then I'll pass over to Rachel the questions on NIM and cost growth. [indiscernible] functionality, we have evolved to be a sort of mobile servicing platform for our Retail Finance customers. So there are about 1.1 million customers within Retail Finance. Many of them, as you know, about 86% already use an online banking portal to [indiscernible] the account, to check their balance, make payments. We introduced the [ App Pay ] Mobile Banking servicing app in December, and that's where we're seeing [ 0.25 million ] customers register for that service. And already actually in the first half of the year, instructions or payments being made by customers are higher from the 250,000 people in mobile banking app than in the online facility that's available to them. So I think there is further opportunity clearly for penetrating more of the 1.1 million customers. And the reality is as ever that just drives further digital adoption, better customer experience and should help on cost effectiveness as well.

[Rachel Lawrence, executive]

Yes. Thanks, Alex. Just on NIM, your point around Vehicle Finance rolling off. Yes, we would expect NIM to come down as we roll the Vehicle Finance portfolio as that's our highest yielding product. I think we will come out with Capital Markets Day at the back end of this year where we hope to be more information about what we think the next 3 years will look like in terms of guidance, but it definitely probably will not have a NIM of 5.5% with the portfolio that we're likely to have going forward. I don't expect it to be lower than 5%, but we are going through the full analysis and budgeting for the next 3 years currently. So yes, it will come down. We probably won't have the medium-term target of a NIM either. We probably will focus on smaller set of targets ultimately returns, which is what's important to us and to our shareholders.

On cost growth at 1% this year, I think we have had, obviously, the benefits of the organizational changes that we did at the back end of last year coming through in 2025. That is not going to repeat into future years. So I think the 5% that we've had is still a valid set of targets in terms of how we want to keep cost down. But I think 2025 will be an anomaly in the sense that we've got the benefits of that organizational changes that we made at back end of quarter 4 coming through for the full year of 2025.

[Alexander Bowers, analyst]

Thank you very much. And thank you, David, for your time over the last few years, and best luck in your future endeavor.

[Operator]

[Operator Instructions] And our next question is from Mike Trippitt from Progressive.

[Michael Trippitt, analyst]

Just coming back to this point about capital generation and capital accretion, which is I think it's a very powerful point. Just 1 small thing, just looking at the sort of first half growth in RWA, it's quite low against the loan book. Is there something there that was anomalous? And just could you give a sort of view of RWA growth going forward, whether there's any change there. And I was also just wondering that overall capital structure as you generate this additional capital, would you seek to gear up in some way? Would you issue a bit more Tier 2 or additional Tier 1, is that exactly in your thinking at the moment?

[Rachel Lawrence, executive]

Thanks, Mike. Yes, it's great to be in a position where we've got capital accretion as we have been consuming our capital as we've been growing in previous periods. The RWA growth is more muted, and that's really a mix. So there was a lot more of the residential investment product with low RWAs. You appreciate that we have quite a wide range of RWAs across portfolio from [ 35 all the way up to 150 ]. So that's the main reason for that slightly lower growth as you look at the results.

In terms of capital structure, we have Tier 2 out there at the moment. It's not being fully utilized, so we wouldn't be looking to raise more Tier 2 currently. And in terms [ of 81, ] yes, we would be able to put them to the capital stack, but the current pricing on it probably is still prohibitive for us, and we are happy with where we are in terms of our Tier 1. We will continue to manage that carefully.

[Operator]

And there is currently no further questions in the phone queue, this, I'd like to hand over for any webcast questions.

[Unknown Executive]

Thanks very much. [indiscernible] , we've had a number of questions through the webcast. Just a reminder, if you'd like to ask a question, please do so by using the tool bar at the bottom of the screen. First question is, how will the chancellors changes to the cash ISA impact your customer deposits?

[David McCreadie, executive]

Yes. Listen, we don't see -- given the scale of the market, I mean, I think we have 1 of the slides, Slide 4 or 5 shows you the size of the household deposit market of GBP 1.5 trillion. So we don't see any change having a significant impact on us if there's changes to limits or whatever. I mean, [indiscernible] something you always keep an eye on. But the art is we just need to generate the funding from some other sources. And based on where the pricing dynamics are currently, that would have a nominal impact on the cost of our retail funding. So it's something we'll continue to keep an eye on. We prefer that the existing structure was retained but nothing that would prevent us from continuing to grow our deposits.

[Unknown Executive]

Next question. [indiscernible] I appreciate that you won't know precisely what the impact on the ruling on commissions will be until the FCA makes it decision. But can you give a bit more color on what your current thinking is on this and how your provisions might be affected under certain scenarios?

[David McCreadie, executive]

Yes. Well, listen, I think the first thing to say is we were pleased as a lender, but also as an industry, the Supreme Court decisions and the judgment on the 1st of August. Clearly, [ SCA ] then made a statement on the 3rd of August, which had a range of potential industry outcomes for potential redress. It's quite hard to be able to get underneath the skin of how were those constructed. So no doubt that will be clarified by the [ FCA ] later in the year. But from our own perspective, the judgments and the decisions in the Supreme Court gave us a bit more certainty in terms of where we have operated historically. And as a reminder, we have had a very low level of 4% as we've indicated previously of discretionary commission arrangements. We stopped using those structures back in 2017, almost 4 years before the FCA and ban their use. And we've never had, as was the case in 1 of the -- in the case it was upheld by the Supreme Court any preferred lending terms and arrangements in place. So that has led us to the detail that Rachel went through that looking at the reweighting of the scenarios, it led us to believe that there's no material change expected in the provision. So that still remains in place. Clearly, we'll need to reassess that later in the year when there's further clarity from the FCA. But our view seems to be very typical of everyone else who has had our previous provision have not changed it, and even some who have never raised a provision yet have still to raise one. So we're comfortable with our position.

[Unknown Executive]

And the next question was submitted through the webcast is how sustainable is your rate of loan growth from here?

[David McCreadie, executive]

Well, that's another 1 that Rachel referred in answering to another question around the fact that there will be a defined set of financial targets that we set out for the medium term at the Capital Markets event later in the year. So we'll -- I think the key thing to see on growth is that having just gone through our strategy refresh, it has validated actually in our 3 remaining specialist lending businesses. These are very large markets where we performed well, but we've still got significant further opportunity to grow. So we will still be a growth story. It will just be turn out our set of businesses, and those are higher returning businesses, which will give a much better outcome for the group.

[Unknown Executive]

So no further questions at the moment. So David, maybe if I hand back to yourself for any closing remarks that you have.

[David McCreadie, executive]

Okay. Thank you. And thank you for all of those questions. I'd just like to reiterate a few points before we close. Our specialist teams have done a fantastic job in driving growth in each of our lending businesses, and we're needing our current GBP 4 billion net lending ambition in the near term. The team has also delivered a significant improvement in cost efficiency and profitability. As a result, we delivered improved returns in the first half of the year and were capital accretive. The decision to stop new lending in Vehicle Finance will support a further sustainable improvement in returns going forward. There are exciting opportunities now and plans [indiscernible] to the next stage of our strategic development and that -- the details of that will be shared at our Capital Markets event in Q4, as we've mentioned. I wish Ian, Rachel and the whole team at Secure Trust Bank every future success in implementing the fresh growth initiatives that we've agreed.

Finally, I'd also just like to thank you for joining myself and Rachel for the presentation this morning, for your questions and for all of our interactions over recent years. So thank you for all of that, and have a good day.