Venture: Mid-Cap Bank

Issue 12;

A cheap British bank.

Secure Trust Bank (STB)

“Secure Trust Bank was founded in 1952 and incorporated in 1954. It was part of the Arbuthnot Banking Group from the early 1980s until 2016. In November 2011 shares in the Bank were admitted to AIM. In June 2016 Arbuthnot Banking Group reduced its interest in the Bank to 18% and, in October 2016, the Bank stepped up to the premium segment of the Main Market of the London Stock Exchange.”

They aim to be the most trusted specialist lender in the UK and help more businesses and consumers fulfil their ambitions. They have a strong balance sheet and have managed to grow their loan book while maintaining high net interest margins.

STB’s price-to-book ratio is 0.37, which is what you’d expect to see in Greece or Ireland after the 2008 crisis. This came up on one of my screens a couple of months ago, and I have been following the situation closely. A low price-to-book ratio for a bank is sometimes a reason to move on, but in this case, it appears to be harsh. Notice how the assets have been rising while the shares have been falling. That’s a double whammy for the value investor.

A Good Company That Is Undervalued

The shares have been easing since 2015, as investors have thrown in the towel on the UK bank sector, especially the smaller ones. In 2016, it was Brexit, then some downgrades from analysts. Then came the pandemic, and as the market cap fell below £300m, many investors would have simply given up. This is why UK small caps are so interesting. Institutional investors focus on big companies, which are super liquid. It will end up so badly, they will come back to small caps in due course. We buy now.

The price has seen a successful retest of the 2020 low, and the 200-day moving average is on the cusp of turning higher.

Seven-Year Bear Market

The four analysts are all buyers since 2021 with a price target of 1282p, which is nearly double the current price of 656p. The shares trade on a 2024 price-to-earnings of 3.8x, and the dividend yield is 6.8%. That’s cheap.

The shareholder register attracted Ruffer in 2018, but they were early. The largest shareholder is Ameriprise, who are specialists in financial stocks. We also see small-cap managers and value managers, which means I wasn’t the first to spot the inherent discount. It’s reassuring.

Risk

It’s a bank, so there’s always the unknown, and the shares only trade around £300,000 per day, so liquidity is poor and makes this a small holding. But other than that, it is cheap, resilient, and simple. I deem STB to be medium to high risk with a high chance of recovery over the medium term. The biggest risks are the economy and market liquidity.

Venture Update

Venture will embrace international stocks, but with such good fishing in UK waters, due to the compelling value, I will carry on. There’s still plenty of work to do!

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture