Secure Trust Bank pulls out of unsecured personal loan market

SOLIHULL-based Secure Trust Bank has said a strong final quarter has put it on course to meet full year market expectations.

In a pre-close trading update, the bank said 2016 had been a year of excellent progress but it was now taking steps to insulate itself from any potential economic fallout during 2017 – including withdrawing from the unsecured personal loan market.

It said due to the strength of continuing operations and the one-off profit arising from the sale of Everyday Loans, 2016 was expected to be the tenth successive year when the return on required equity was in the region of 30%.
The significant increase in capital arising from the disposal of Everyday Loans has resulted in return of equity reducing while the capital is re-deployed over time.

Looking ahead, it said that given the uncertain economic outlook, the bank had continued to focus on growing its business in a prudent manner, in order to maximise shareholder value creation rather than solely focusing on balance sheet scale.

“To mitigate the potential that weaker economic conditions and higher inflation could potentially lead to future increases in impairments particularly in consumer finance, the group has tightened credit underwriting standards and increased pricing in these areas during the final quarter,” it said.

“Despite this, net balances in Consumer and SME lending have continued to be successfully grown in line with the strategy to focus on short term Retail Finance, Motor Finance which provides security in the form of the vehicle financed and lower loan to value secured SME lending.”

It said its cautious stance differed from a number of other lenders, particularly in the Unsecured Personal Loan market, where a significant proportion of loans are used to consolidate debt.

It said that on a number of previous occasions it had expressed concern about the competitive dynamics in this market and the potential for risk to be mispriced.

“Despite forecasts of slower economic growth, unemployment rising from an 11-year low and higher inflation, some lenders are now offering medium term UPL at record low interest rate margins. STB regards these dynamics as unsustainable and therefore, having reduced UPL lending in the first half of 2016, intends to cease originating new UPL assets at this juncture,” it said.

“STB has a large amount of experience in the UPL market, having been active since STB’s formation in 1952, but at times has elected to reduce its exposure, for instance substantially reducing its UPL activity in 2006-08, in response to an unattractive competitor pricing environment at the time.”

It said it planned to re-enter the UPL market once the risk adjusted yields available became more attractive. This decision is not expected to have a material impact on 2017 earnings.

“Following the successful completion of a number of complex projects in 2016 including the divestment of the subprime unsecured personal loan business of Everyday Loans, the closure of the current account product and the step up from AIM to the main market, STB enters 2017 well placed to pursue its strategic priorities through developing its business model organically and pursuing M&A opportunities,” it said.

“This coupled with the main market premium listing and substantial capital resources, positions the group well to navigate the evolving economic and regulatory environment and seek to take full advantage of any opportunities that may arise.”

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