Secure Trust Bank: below book value, and the price already assumes a credit shock

Secure Trust Bank earns about 12% on its equity and trades at 0.74 times tangible book value. A bank with that return would normally trade near or above book. The gap is explained by one number: the market price matches a bank that earns about 9.3% forever, which is roughly what STB would earn if its cost of risk rose from 0.9% to about 1.5% of loans. The price already assumes a credit shock.

At the October 6, 2026 close of £15.22 (1,522 pence) the shares trade 38.3% below my triangulated Base value of £24.67, an upside of 62.1%. The Bear value of £12.52 is 17.7% below the price and the Bull value of £35.86 is 136% above it. The required margin of safety (MOS) is 50%, which puts the maximum buy price at £12.33. The verdict is Hold, not Buy, because on this site a Buy requires the price to be at or below that maximum buy price.

Route: SF-02 Banks. Economic classification: Quality Growth (8/12). Primary method: residual income on tangible book value. Secondary method: forward price to earnings. Corporate free cash flow is not valid for a bank and is not used. Values are present fair value estimates, not 12 month price targets. All figures are in pounds per share unless stated.

What Secure Trust Bank is

Secure Trust Bank is a UK specialist bank based in Solihull. It lends through two lines, about 60% Business Finance (real estate finance and commercial finance) and 40% Retail Finance (point of sale credit through partners such as dentists and retailers), and funds itself mostly with retail deposits. It has no current account franchise, so deposits are rate sensitive. Net lending was £3.5 billion at June 30, 2026.

The group has just finished a restructuring. It sold its Vehicle Finance business (consideration of £458.6 million, with a gain of about £9 million recognised in 2026), which released capital and lifted the CET1 ratio from 12.9% to 14.3%. It now targets lending growth of about 10% a year and a return on average equity above 16% in 2028, helped by £25 million of annual cost savings (£15 million already at run rate).

The latest half-year

Net interest income fell to £76.6 million from £99.0 million because Vehicle Finance is now excluded, not because margins weakened. The CET1 ratio of 14.3% includes about 180 basis points from the Vehicle Finance sale and is guided to about 13.5% at year-end, after the second £5 million buyback tranche (about 20 basis points).

Which return on equity matters

The headline return the bank likes to quote is an adjusted return on required equity of 14.5%. That measures profit against the equity the bank needs to hold, which is lower than the equity it has. The ordinary shareholder owns all of the equity, so the return that matters is the total return on average equity of 12.3%. The gap is surplus capital, and the bank is guiding CET1 down to about 13.5%, so the gap should close. A third-party summary of the slides shows an adjusted return on average equity of 13.1% (I could not verify it). My model starts from 12.3%.

Both measures sit above my cost of equity of 11.5%, so STB passes the bank framework test that a price under 0.8 times tangible book is acceptable only when return on equity is above 10%. The group-wide share of non-performing loans was not available in the sources I could check (UNAVAILABLE), and I rely on the Business Finance Stage 3 share and the cost of risk instead.

Book value, shares and funding

Tangible book value was £20.45 per share on June 30, 2026 (equity of £389.1 million, tangible book of £384.0 million). The company's per share figures divide by fewer shares than the 19.12 million in issue, which implies that shares held by an employee trust are excluded (my inference from the arithmetic). I use the company's reported £20.45.

The buyback reduces the share count. Shares in issue fell from 19,118,520 on June 30 to 18,613,597 after purchases to October 2, a reduction of 2.6% at prices between 1,480p and 1,574p, which is below tangible book value and therefore adds to book value per share. I do not add the accretion to my numbers. It is worth about £0.2 per share on my estimate. There is no dilution.

The funding model deserves attention. The loan to deposit ratio of 107% means the bank funds part of its loans with equity and wholesale money, and deposits fell 7.9% in the half. Liquidity is not a concern today (liquidity coverage of 209% on average, and 97.6% of deposits are covered by the UK deposit guarantee scheme), but a bank without a current account base pays market rates for deposits, and that matters if margins tighten.

Primary valuation: residual income

The model starts at tangible book value of £20.45 per share on June 30, 2026, runs the second half of 2026 and fiscal years 2027 to 2031, and adds a terminal value at the end of 2031. Cost of equity is 11.5% and terminal growth 3.0%, the same in all three scenarios so that risk is not counted twice. Both are my estimates: the shares have a beta near 1.0, and I add a premium for a small specialist lender. Distributions (dividends and buybacks) are 30% of profit, so equity grows by about 10% a year, in line with the 8% to 10% lending growth the bank plans.

The Base return path is 12.5% for the second half of 2026, then 13.5%, 14.0%, 14.5%, 14.5% and 14.5% for 2027 to 2031, with a terminal return of 13.0%. It stays below management's target of above 16%.

Residual income is positive in every year, because the return is above the cost of equity. The Base value is £26.24: £20.45 of starting book value, plus £2.46 for the present value of the excess returns through 2031, plus £3.32 for the terminal value (a justified price to book of 1.18 times on £34.28 of end-2031 book value), or 1.28 times tangible book. The terminal value is about 57% of the value above book.

Sensitivity: value per share, cost of equity against long-run return on equity

Each row ramps from today's 12.3% to the plateau by 2030 and uses the plateau as the terminal return. The price of £15.22 is reached at a plateau of about 9.3% and a cost of equity of 11.5%.

Secondary valuation: forward earnings

For the second method I apply a price to earnings multiple to next-twelve-months earnings per share, which I estimate at £2.80: half of my second half 2026 figure for the fourth quarter plus three quarters of 2027. A multiple of 7.5x is my assumption (ESTIMATED, tested at 6x and 9x). It gives £21.00 (£16.80 at 6x and £25.20 at 9x). At £15.22 the shares trade at 5.4 times that figure and 6.7 times trailing earnings of about £2.26. A peer table and a synchronized valuation history are not available from free sources, so I do not use them.

This method is not independent of the first: both use my earnings path, and the multiple is a judgment. Its value is that it asks less of the long-term assumptions.

Growth diagnostics

The growth valuation cross-check (SM-19) does not apply in the usual way, because bank earnings swing with credit costs, tax and rates, and a PEG ratio is not a bank metric. Cyclical distortion: medium. Free cash flow growth (SM-20) is not applicable to a bank. The sector equivalent is per share value creation: tangible book value per share rose 5.8% in 2025 to £19.73 and 3.6% in the first half of 2026 to £20.45, the dividend rose 5% and the buyback is under way. Growth quality is structural with cyclical credit risk, estimate reliability medium. None of these diagnostics sets fair value, MOS or the verdict.

Valuation triangulation

The two methods differ by 22.2%, in the warning range (20% to 30%), so I lower the valuation robustness score by one point and add 5 points to the required MOS. The weights favor the residual income model because it is the method designed for banks. Analyst price targets do not enter the Base. Bear and Bull come from the residual income model only.

What is the market already pricing in?

At £15.22 the shares trade at 0.74 times tangible book value. With a cost of equity of 11.5% and growth of 3%, a justified price to tangible book of 0.74 corresponds to a return on equity of 9.3% forever, about 3 points below today's 12.3%.

The path to that number is credit. A cost of risk of 1.5% instead of 0.9% on £3.5 billion of lending costs about £16 million a year after tax, about 4 points of return (assuming a 25% tax rate, ESTIMATED). That is my own red line for cost of risk and is not far from the 1.4% the Retail Finance business already runs at. In other words the market is paying for a credit downturn that has not arrived. If the return merely holds at 12.3%, the justified price to tangible book is 1.09 times, or £22.37.

Bear, base and bull scenarios

I assign no probabilities. The Base shown is the triangulated value; the residual income value alone is £26.24, and the Bear and Bull are residual income values. The payoff is asymmetric (an 18% fall against a 62% rise to Base), but the Bull value rests on terminal value for about 70% of its gain over book, so I treat it as an upper bound and not as a target.

How the buy price is set

A Confidence C score carries a base MOS of 35% to 50%. I use 35%, the low end, because the return is above the cost of equity and capital is strong. I add 5 points for credit cyclicality in UK consumer and property lending, 5 points for funding and regulatory risk (a loan to deposit ratio of 107%, falling deposits, and a motor finance legacy I cannot size), and 5 points because the two methods differ by 22%. The required MOS is 50%. Applied to the Base of £24.67, the maximum buy price is £12.33 (0.60 times tangible book), and a 60% margin marks a strong-buy reference at £9.87.

At £15.22 the shares trade above that zone, so the verdict is Hold. The numbers are attractive: the Base sits 62% above the price, and the market is already pricing a return of 9.3%. But the Bear value of £12.52 is only 18% below the price, and a specialist lender is sensitive to the credit cycle. A Buy comes at £12.33 or below, which is close to the Bear value, where the margin of safety is the one the framework asks for.

Dividend and capital return

The 2025 dividend was 35.5p (up from 33.8p), a yield of 2.3% at the current price, and the 2026 interim dividend is 12.4p, up 5.1%. The ordinary payout is only about 15% of earnings. The larger return is the £10 million buyback, equal to about 3.5% of the £283 million market value. Together they come to a distribution yield of about 6% this year, bought at 0.74 times tangible book.

Reasons to own STB

• Priced for a downturn. At 0.74 times tangible book and 5.4 times next-twelve-months earnings, the price assumes a return of 9.3%, below the 12.3% earned today.
• Strong capital. CET1 of 14.3% against a guide of about 13.5% leaves room for 8% to 10% lending growth, dividends and buybacks.
• Buybacks below book value. They add to tangible book per share, and 2.6% of the shares have been retired since June.
• Operating leverage. A cost-income ratio of 46.5% with £25 million of cost savings targeted by 2028, and a clear target of above 16% return on equity.
• Simpler group. The Vehicle Finance exit removes the business that caused most past credit losses and conduct risk.

What could go wrong?

• Thesis breaker: credit costs rise while returns fall. A sustainable return below about 11% with a cost of risk toward 1.5% would justify the current price.
• UK consumer and property credit. Retail Finance already runs at a 1.4% cost of risk, and Real Estate Finance has had large single loan losses in the past.
• Funding. A loan to deposit ratio of 107% and rate-sensitive deposits could squeeze the net interest margin.
• Legacy motor finance. The size of any redress or regulatory liability from the exited business is not quantified in the sources I checked (UNAVAILABLE).
• Execution. The above 16% target depends on cost savings and growth in new products and partnerships, and on 2026 being a "transitional year" as management calls it.
• Liquidity of the shares. Average daily volume is about 50,000 shares, so large positions are hard to build or exit.

Management execution

Management has delivered the Vehicle Finance exit, raised CET1, cut costs ahead of plan, kept guidance and started a buyback below book value. The offsets are a return metric chosen to flatter (required equity rather than actual equity), a deposit base that shrank 7.9% in the half, and a medium-term target that is still two years away. Assessment: 15/20, good. The next test is the 2026 full-year result and the updated guidance for 2027.

Stock Analyza scorecard

The first draft scored 10/12 (Compounder range), with full points for franchise and runway and a return spread of 2/2. The spread is only 0.8 points (12.3% against 11.5%), the bank has no deposit franchise to speak of, and full runway points need proof of high returns on new capital. Business quality is 67/100: moat and franchise 13/20, return versus cost of equity 11/20, balance sheet and resilience 11/15, earnings and credit quality 11/15, growth and runway 10/15, management and capital allocation 7/10, governance and dilution 4/5. The valuation score is 61/100: discount to Base 31/40 (a 38.3% discount against a 50% requirement), protection against the Bear case 8/20, agreement between methods 8/15, historical valuation 4/10, market expectations 8/10, data and model quality 2/5.

Confidence score

Reporting is timely and the main figures reconcile. The grade is held down by a model that depends on a return path I had to estimate, a 22% gap between two methods, adjusted metrics chosen by the company, an unquantified legacy liability, and a range of £12.52 to £35.86 between Bear and Bull.

What I would watch from here

Today the return on average equity (12.3%) and the loan to deposit ratio (107%) are yellow, and the cost-income ratio (46.5%) is yellow. The cost of risk (0.9%), the risk-adjusted margin (4.2%), CET1 (14.3%, guided to 13.5%) and tangible book value (up 3.6%) are green. The next review points are the 2026 full-year result, updated targets and any motor finance news. The price at which the verdict would change to Buy is £12.33.

The three most important thesis breakers

1. Sustainable return on equity falls below about 11% while cost of risk rises materially.
2. Cost of risk goes above 1.5%, particularly in Retail Finance and Real Estate Finance.
3. CET1 falls below 12.5% or a motor finance liability consumes capital.

Adversarial review

I recomputed every figure from the half-year results and the share count announcements, rebuilt the valuation as an explicit residual income model, and checked the price against the exchange record and the company's share price page. The reported figures reconcile. The corrections were in the book value input, the return basis, the scenario values, the triangulation, the MOS and the scores.

Two corrections move the value up: the higher tangible book (+3.6%) and the compounding of retained earnings at a 30% payout, which lifts the Base above the draft. Seven move it down or lower the scores. The Base rises, yet the verdict is more cautious, because the required margin of safety doubled. The strongest counter-thesis, for the bears: a specialist lender with no current account base, a loan to deposit ratio above 100% and UK consumer and property exposure deserves a permanent discount to book, and with a cost of risk of 1.5% the shares are worth about £15, which is today's price. The response is that this is roughly what the market already assumes, and that the Bear value is only 18% below the price while the Base is 62% above it.

The value is above the price in the central and generous cases and below it in the conservative case. In the generous case the maximum buy price would be £17.64 and the price would sit inside the zone, which would be a Buy. In the central and conservative cases the verdict is Hold. Audit flags: the cost of equity, the return paths, the 7.5x multiple, next-twelve-months EPS, the 25% tax rate and the exclusion of employee trust shares are my estimates. The group Stage 3 ratio, the motor finance exposure, a peer table and a synchronized valuation history were not available. The price of £15.22 comes from a broker app after the exchange close; the exchange page showed 1,518p a session earlier, and I did not retrieve the official closing auction price. The publication gate status is PASS WITH WARNING because the valuation depends on a return recovery that is not yet in the numbers.

Final verdict: hold at £15.22, watchlist for new money

Secure Trust Bank earns more than its cost of equity, has strong capital, is buying back shares below book value and trades at 0.74 times tangible book. The market price is consistent with a bank earning 9.3% forever, which would need a credit downturn that is not visible in the half-year numbers. My Base value of £24.67 needs the return to rise to about 14.5%, below management's own target.

Verdict: HOLD at £15.22. Triangulated Base value £24.67, upside 62.1%, Confidence C (15/25). Required margin of safety 50%, maximum buy price £12.33.

The valuation alone classifies as Deep Undervalued, which would map to a Strong Buy. The verdict rule on this site is that a Buy needs the price at or below the maximum buy price, and a Strong Buy needs it at or below the 60% margin reference of £9.87. At £15.22 the price is 23% above the buy zone, so the verdict is Hold. It changes to Buy if the price falls to £12.33 or below with the numbers intact. It also changes if the return moves above 14% as the cost savings arrive, because a higher Base raises the buy price. It weakens if the cost of risk moves above 1.5%, if CET1 falls toward 12.5%, or if the return on equity heads below 11%.

The main thesis breaker is a sustainable return on equity below about 11% while credit costs rise materially.

Sources

Primary sources include Secure Trust Bank's interim results announcement of August 13, 2026, the 2025 annual results of March 12, 2026, its total voting rights and share buyback announcements, and coverage of the half-year presentation and results.

The reference market price is the October 6, 2026 close of 1,522p, taken from a broker app after the London close. A price of 1,538p in the first draft was a 09:00 delayed quote. Share counts are from the company's regulatory announcements, tangible book value per share is the company's reported £20.45, and the other per share figures use that denominator. The cost of equity, return paths, earnings multiple, next-twelve-months earnings and tax rate are analytical estimates, not company guidance.