investor presentation 14 october 2013 - secure trust bank...market dynamics - scale £m’s activity...

Investor Presentation 14 October 2013

PAUL LYNAM – Chief Executive Officer

Simple, straightforward banking

Agenda

• Competitive landscape Paul Lynam, CEO STB Group

• Strategic focuses

– Growth Jon Bowers, Group Head of Lending

Danny Malone, CEO Everyday Loans and Head of STB Personal Lending

Nick Davies, CEO V12 and Head of STB Retail Finance

– Sustainability and Safety David Nield, COO STB Group

– Being a great employer Anne McKenning, Group Head of HR

• Questions and wrap up All

PAGE 3


PAGE 4

Strategy – Continues to Deliver

1. Protect the reputation and sustainability of the bank via prudent balance sheet management,

investment for growth and robust risk and operational control.

2. Maximise shareholder value by:

a. Strong organic lending growth.

b. Promotion of existing and development of new commission based income streams.

c. Very selective acquisitions.

3. Making Secure Trust Bank a great place for staff to work and enjoy progressive careers.

All underpinned by our philosophy of treating customers fairly and providing them with simple

straightforward banking solutions.


PAGE 5

Bringing the corporate strategy to life…….

Grow a sustainable business by doing more of our current

activity, introducing new product lines & making new acquisitions

Safeguarding the integrity & sustainability of the Bank

Making this a great Bank to work for


Competitive landscape

PAGE 6


February 2013

• ….‘the financial crisis has strengthened the grip of “a few big banks”

whose market power “verges on an oligopoly…… “I want upstart

challengers offering new and better services that shake up the

established players”

George Osborne

PAGE 7


All of these were standalone competitors 1/1/2000

Abbey National Alliance and Leicester Bank of Scotland

Birmingham Midshires Barnsley BS Bradford and Bingley

Bristol and West Britannia BS Chelsea BS

Cheltenham and Gloucester Chesham BS Cheshire BS

Clydesdale Bank Derbyshire BS Dunfermline BS

Egg Halifax ING Direct

NatWest Bank Norwich and Peterborough BS Scarborough BS

Stroud and Swindon BS Woolwich Bank Yorkshire Bank

PAGE 8


Supportive Political and Regulatory indications

• Public acknowledgement that existing rules favour large banks.

• Potential for PRA / BoE to be given competition objective by

Parliament in addition to ones around safety and soundness of

financial system.

• More effective lobbying by smaller banks – Paul Lynam now chairing

Challenger Banks Panel for the British Banks Association.

• Labour proposing punitive levy on big banks to fund increased state

welfare.

• Changes to SME risk weightings from 1/1/14

PAGE 9


Conduct headwinds faced by some competitors

• Previous mis-selling issues continue to absorb resources;

– Single Premium PPI

– Identity / Card theft insurance (CPP)

– Interest rate management derivatives

– LIBOR fixing

• Potential new reviews?

– Packaged Current Accounts

– Teaser rates

– Swiss Financial Market Supervisory Authority investigating Fx market

PAGE 10


Other headwinds faced by some competitors

• Banking Reforms and Ring Fencing

• Sub optimal legacy IT systems require expensive updating

• Is Faster Current Account Switching a precursor to full account

number portability akin to mobile phone market?

• Is there a profitable long term future for full service branches?

• Basel III and CRD IV

– Much higher core equity tier one capital requirements

– Higher Systemic risk and capital conservation buffer add ons

– Leverage ratio limitations

– Dramatically greater reporting requirements

PAGE 11


Potential implications of headwinds

• To rebuild reputation and mitigate the threat to profit / returns some

larger competitors might;

– Invest heavily in IT / Compliance / Audit and Cultural programmes

– Cut costs significantly

– Sell businesses / portfolios of assets

– Exit sub scale activities

– Pass on any increase in deposit costs to borrowers

– Reduce total amount of lending, especially in investment banking

PAGE 12


Focus of other ‘challenger’ banks

Bank Market focus

• Tesco Insurance, cards, prime lending, mortgages, Fx

• Sainsbury Insurance, cards, prime lending, Fx

• Virgin Insurance, cards, prime lending, mortgages, Fx

• Aldermore SME & property lending, asset / invoice finance, mortgages

• Metro Competing head to head on service with high street banks

• Shawbrook SME & property lending, asset finance, secured lending

• One Savings Mortgages, insurance, secured lending

PAGE 13


Market dynamics - scale

£m’s

Activity Market STB %

Lending secured on dwellings 1,267,811 0 0.00%

Consumer Credit 158,270 366 0.23%

Loans provided to SMEs 155,464 <2 0.00%

Overdrafts provided to SMEs 21,126 0 0.00%

Factoring corporation lending 7,904 0 0.00%

Data from Bank of England bank stat reports July 13 and STB H1 statements

PAGE 14


Market dynamics – write off trends

PAGE 15

year Corporates Consumers Consumers Consumers

Loans to Non

financial

businesses

Loans secured

on dwellings

Credit Card

borrowing

Other

consumer

credit

2008 1,973 408 3,200 3,244

2009 5,619 984 4,117 4,527

2010 6,447 658 6,181 3,753

2011 7,600 589 3,643 2,622

2012 6,575 547 2,462 1,849

2013* 5,700 516 1,516 1,224

Data in £m from Bank of England bank stat reports July 13

* 2013 is H1 annualised


PAGE 16

Growing Loan Book

CAGR of 78%

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012 H1 2013

£ m

Unsecured Lending Motor Finance Retail Finance Acquired and Other ELL V12


Retail POS finance (15% of revenue1) (2010 9%) Motor finance (22% of revenue1) (2010 16%)

Fee-based accounts (19% of revenue1) (2010 57%) Unsecured lending (44% of revenue1) (2010 18%)

Diversifying revenue streams

Data from H1 2013 interim report . 2010 data excludes income from acquired Citi / LV portfolios PAGE 17

http://www.specialistautomotivefinance.co.uk/saf/index.jsp


£4.0m

£7.6m

£2.6m

£1.1m

£2.2m

£4.2m

£0.4m

PAGE 18

Diversifying revenue streams

Total income through lending and transactional channels is split as follows:

£45.2m £22.1m

H1 2012 H1 2013

This was presented net of £1m fee and commission expenses last year

£5.3m

£10.0m

£4.4m

£14.6m

£2.2m

£2.3m

£4.0m

£2.1m

£0.3m

Personal lending

Motor finance

Retail finance

Everyday Loans

V12

Current account

One Bill

DMS Income

Other incacquired portfolios


PAGE 19

Recent Acquisitions

• New business volumes have increased and credit quality has remained stable.

• Investment in new offices in Belfast and Ipswich Q1 2013 and Edinburgh Q3 2013. More offices planned.

• Rationalising datacentre into STB facility to generate efficiency savings.

• Acquired on 2nd January 2013, V12 is a specialist retail finance provider based in Cardiff.

• V12’s strength in online finance will help bring new technologies and platforms to the STB Group, enabling the Bank to further develop its offering within the market.

• The first 6 months has seen the integration of the STB & V12 sales teams to deliver the growth in the retail finance sector.

• Lending volumes have grown by more than 40% since acquisition.

• Acquired on 15th January 2013 successfully integrated.

• Developed a significant new prospect pipeline which should begin to

deliver in H2.

• Commenced a number of IT projects which will significantly enhance the

efficiency and effectiveness of our activity.


Summary

• Operating environment has been and is likely to remain conducive

to growth of well funded and strongly capitalised banks not

burdened by historic issues.

• Market is huge and supports significant numbers of competitors.

• Our 3 year growth focus is on;

1. Maximising potential of existing lending activities

2. Developing sustainable new growth engines

3. Very selective acquisitions

PAGE 20


PAGE 21

Our strategy

Grow a sustainable business by doing more of our current

activity, introducing new product lines & making new acquisitions


STB Commercial Finance

PAGE 22


Commercial Lending – SME landscape

• Approximately 45% of all those employed in the UK are employed by

businesses with revenue of less than £25m. (Source ONS and BIS)

• It is a business segment that has suffered most and continues to suffer from

a lack of liquidity from the larger UK banks (leading to under-investment).

• The ability to ‘structure’ customer solutions is the key driver to (a) developing

specialisms by asset class, product & market segments (b) achieving

sustainable margins (c) creating barriers to competitor entry.

• We will focus initially on two areas;

– Asset based lending

– Property

• Our approach will be highly selective (rather than capture all), risk aware

(priced accordingly) and with people, processes and platforms all fit for

purpose. PAGE 23


Invoice Finance Landscape

• ABFA (Asset Based Finance Association) has circa 40 members (95% penetration)

• > 40,000 companies use a form of Invoice Finance, with exposure £15bn

• Market is split:

– High street banks have 65% market share / Independents have 35% market share

– Factoring represents circa 45%/50% customer by numbers but < 20% by exposure

• STBIF will typically operate in the £0 to £5m turnover sector of the market

• Currently 36,000 customers with £4bn exposure in the sector

• Typical industries are manufacturing, distribution, wholesale, service

PAGE 24


Invoice Finance competitive positioning

• Key to success is to leverage strength of bank with agility of an independent

– Major high street banks have cumbersome operating models which provide poor service

– Some independents provide good service but others have poor reputation / lack capital to grow

• Customers will be won via proven business developers, through mix of:

– Accountant generated (typically regional tier 2/3 firms) ...........estimated 45%

– Broker market ...........estimated 35%

– Self generated (data mining, customer/debtor intros etc) ...........estimated 20%

• Coverage will be in the major centres and will leverage the existing Everyday Loans

and STB infrastructure

PAGE 25


Invoice Finance Management Team

• Managing Director

– Proven individual with appropriate industry expertise and professional standing

– Known to senior management of Secure Trust

– Start date TBA

• COO

– Proven individual with appropriate industry expertise

– Known to senior management of Secure Trust

– Starts 4 November 2013

• Target Regional Directors

• Proven individuals with appropriate industry expertise

• Well known to MD designate

Recruitment of broader team members will take place once operating platform is fully functional

PAGE 26


Secure Trust Bank - Property Finance

• Capital values (i.e. collateral/asset values) are becoming more stable although focus

will be on better counterparties and prime assets in prime locations.

• Market is underserved as larger banks deal with legacy real estate portfolios.

• We are highly cognisant of the market risk on valuations/exit routes but there

remains selective good opportunities (ie this is not a volume focus).

• Our interest is in both investment and development, but predominantly commercial in

composition.

• Residential property investment will also be considered (i.e. where High Net Worth

individuals are involved).

PAGE 27


Motor Finance : Lending via dealerships and brokers

• Customers typically considered to be from

socio-economic groups C1, C2 and D

• Distribution through geographically spread

dealerships and centralised key accounts (i.e.

CL4U) and brokers.

• Primarily focused on used car market.

• On-going growth will be driven by;

– Speed and quality of service

– Relationships with introducers

– Product and distribution channel innovation

Max advance £15,000

Maximum term 5 years

Loan book progression

Competition

Key statistics

• We expect to see

competitors relaxing credit

criteria as economy

improves and will respond

to any threats this poses.

0

20

40

60

80

100

120

Dec 09 Dec 10 Dec 11 Dec 12 Jun 13

£m

Loan Portfolio

CAGR = 143%

PAGE 28


Unsecured lending: Lending direct and through affinity

partners and Everyday Loans Limited

• Unsecured lending to customers typically

considered to be from socio-economic groups

A - D

• Sources of business are internet, affinities,

brokers and cross-sell to existing customers

• Major banks are still restricting lending to their

own customers

• Pricing is rate to risk.

Active Max advance £15,000

Maximum term 5 years

Key statistics


Competition

CAGR = 120%

• A number of

competitors

have reduced

their lending in

this market or

completely

exited

0

20

40

60

80

100

120

140

160


£m

Loan Portfolio

PAGE 29


Personal Lending Growth opportunities

• Direct to Bank increased spend & customer acquisition

• Increased branch footprint for Everyday Loans

• Improved customer referral down product chain

• Portfolio acquisition

• Efficiencies through integrated systems and MI

• Product innovation

• Sourcing new affinity partners with a whole of market solution

• Targeted cross-sell to existing customers across all STB Group products

• Maintain tight fiscal discipline with pricing for risk and control of losses

PAGE 30


Retail finance: Lending solution for store based and

online retailers

• Targeting Prime Credit Profile Customers

typically from socio-economic groups A,B&C1

• Loan products mainly promotional credit

subsidised by retailers or suppliers

• V12 Retail Finance acquisition consolidates

sector leading position in:

– Cycles

– Musical instruments

– Online ‘e-tailers’

• Successful integration of V12 acquisition during

H1 2013 provides enhanced front & back end

platform for growth Active

Average advance £1,000

Average term 12 months

Lending Profile


Competition

CAGR = 124%

• Limited signs of

new entrant

activity or

material growth

appetite from

existing lenders

0

20

40

60

80

100

120


£m

Loan Portfolio

PAGE 31


Retail finance: Lending solution for store based and

online retailers

• Focus on controlled organic growth to sustain

current margins (‘more of the same’)

• Expansion driven by service based proposition :

– Multi Channel processing capability

– Experienced/professional Sales Team

– Market leading technology

– Ability to bespoke solutions relative to size

of Retail partner

• Consolidate position in existing core sectors via

enhanced service to retailers:

– Rollout of V12 Operating platform

– Expanded Account Management team

• Entry into new Sectors consistent with current

consumer risk profile:

– Season Ticket

– Home Improvements

Market Overview 2013 - est

• We estimate the Retail POS Finance market

expanded by 15% during 2012

• Market size set to benefit from any increase in

retail sales

• We do not disclose our annual volumes

0

200

400

600

800

1000

Other STB Ikano Barclays Laser Hitachi

Annual Lending Volumes

PAGE 32


PAGE 33

Our strategy

Safeguarding the integrity & sustainability of the Bank


Funding and Capital strategies unchanged

• Funding

– Minimum 100% Deposit to Loan ratio with additional surplus funding accessible via FLS

– Maturity profiles broadly matched minimising maturity transformation risks

– Interest basis risk managed via use of fixed rate lending and deposits

• Capital

– Prudent surpluses above regulatory minimums

– Modest gross leverage ratios

– Vast majority in Common Equity Tier One ( core tier one equity)

PAGE 34

Year YE 2011 H1 2012 YE 2012 H1 2013

Core Tier 1 ratio 21.0% 15.0% 23.3% 17.0%


Risk and Operational disciplines

PAGE 35

• Governance

– Established Board and committee structures

– Moving to blend of internal and external operational audit

– Significant investment in team and specialisms

• Risk

– Scorecard driven with defined policy validation were manual oversight required

– Deep dive review of each portfolio per quarter by input, process and outcome

– Established and tested BCP and DR

– Leaders physically close to the business, demonstrating the values

– Proactive approach to risk with ability to move operationally at pace

– Robust sector and product approval process


Treating customers fairly

PAGE 36

• Philosophy

– Customer focus is at the heart of what we do and how our employees behave, not just one

of our core values

– Our products are consistently simple and straight forward in their design. We see this as a

competitive advantage.

– We seek for our products to offer value to our customer and an appropriate return for our

shareholders without the need for cross sell or subsidy


Treating customers fairly

PAGE 37

• In action

– Savings

– We don’t entice customers with attractive introductory offers with the hope that the

deposits will remain after that offer expires

– When we reduced the rate of our notice accounts we extended the notice period we

gave to the customers to ensure that they weren't trapped into the account if they

wished to move their money elsewhere

– Lending

– New options for customer to choose due dates

– Extended period allowed for customers to bring arrears up to date before bureau

reporting

– Current Account

– No hidden or penal charges


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Our strategy



PAGE 44

Our strategy – Encouraging Personal Growth


• Structured induction and development framework

• Earn and Learn initiative

• Ifs university college and relevant professional qualifications

• Apprenticeships – internal and external

• Leadership Development Programme


PAGE 45

Our strategy – Treating Employees Fairly


• Clear performance objectives aligned to our strategy

• Open, transparent and equitable remuneration framework

• Encouraging employees to have a voice

• Rewarding and recognising contribution

• Anniversary and key event awards

• We celebrate success

• Opportunities and support to progress


Measures of success

PAGE 46

‘People state that they are treated equally and fairly throughout the organisation, and

appreciate the development that they receive both in terms of their training and also in

the assistance that they receive when they need support from the organisation’

‘There is a strong business planning process in place, with clear Vision, Mission and

Values effectively embedded within and throughout the Company’

‘People feel very committed to the organisation, recognising that it has a strong team

ethos, and there is significant pride displayed in working for the organisation’


What next? – Our Aspiration

PAGE 47

Wrap up

PAUL LYNAM – Chief Executive Officer


Secure Trust Bank - Invoice Finance

FACTORING CONFIDENTIAL INVOICE DISCOUNTING

• Assignment is fully disclosed to debtors

• Financier provides outsourced credit control,

cash allocation and debtor litigation services

• Financier sends statements and reminder

letters to debtors

• Debtor monies paid direct to financier

• Client assigns all invoices, financier maintains

an open item ledger

• Confidential arrangement

• Client handles own credit control, cash

allocation and dunning

• Debtor monies are paid to a trust account

which is controlled by the financier

• Client assigns all invoices on a bulk basis,

financier reconciles to customers sales ledger

on a monthly basis

• Typically aimed at new starts, smaller

companies, those with less sophisticated

systems or those perceived to be too high

risk for Confidential Invoice Discounting

• Some customers use Factoring just for the

service

• Suitable for companies with turnover

£750k/£1m and greater

• Customer must have good internal systems

for credit control, cash allocation etc

Both products can have bad debt protection added in (outsourced)

It is possible to have Confidential Factoring and Disclosed Invoice Discounting

investor presentation 14 october 2013 - secure trust bank...market dynamics - scale £m’s activity...

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