Secure Trust Bank upgrades cost-cutting target as FCA review weighs on earnings

Secure Trust Bank has raised its cost-cutting target, while a review by City regulator affecting its vehicle finance arm weighed on the firm’s earnings in the first half of 2024.

On Wednesday, the London-listed lender upgraded its annualised cost savings target under its “Project Fusion” programme to £8m from £5m by the end of 2025.

Secure Trust said the scheme was on track to deliver £5m in savings by the end of this year. It had contributed to an improved adjusted cost-to-income ratio of 53.7 per cent for the first half of 2024, down from 55.9 per cent in the same period last year.

The bank’s statuatory pretax profit for the six months rose 14 per cent to £17m compared to last year. On an adjusted basis, profit ticked down 1.7 per cent – rising 12.4 per cent to £45.2m before impairments.

Secure Trust took an impairment charge of £28.2m, up from £23m a year prior, highlighting challenges tied to the Financial Conduct Authority’s (FCA) Borrowers in Financial Difficulty (BiFD) Review.

The bank discussed its collections processes, procedures, and policies with the regulator earlier this year and temporarily paused collection activities in vehicle finance as a result.

It said this move had caused higher volumes of loans reaching default status and delays in repossession and recovery, resulting in higher motor finance provision coverage of 10.7 per cent, compared to 8.9 per cent in 2023, and the business’ cost of risk jumping to 8.8 per cent from 2.4 per cent.

Still, Secure Trust said the credit quality of its new auto lending had “improved over time” and that the division’s arrears had fallen since the end of last year, with the unit “tracking towards pre-BiFD review levels”.

The bank has said it is not significantly exposed to a separate FCA review into now-banned motor finance discretionary commission arrangements.

Secure Trust’s loan book grew 3.2 per cent to £3.42bn, boosted by 7.6 per cent growth in consumer finance. The bank said it expected further growth later this year, progressing towards its target of £4bn. Deposits rose six per cent to £3.04bn.

The bank’s net interest margin – measuring of the gap between interest received on loans and rates paid for deposits – dipped one percentage point year-on-year to 5.3 per cent.

It said the decline reflected a “strategic shift” to lower-yielding, lower-risk lending in business finance and consumer finance divisions, as well as the higher cost of funds.

“We are still targeting significant growth in year-on-year profits, although slightly below our previous expectations,” the bank added.

Secure Trust said a “more benign” outlook for inflation and lower borrowing costs should boost demand for its services.

“We have continued to grow our loan book towards the £4bn target, the level at which we expect to deliver an adjusted return on average equity of 14-16 per cent,” said chief executive David McCreadie.