Investors have welcomed Secure Trust Bank’s (STB:AIM) new strategy that will improve the quality of the assets sitting on its balance sheet, but could see margins squeezed.
Shares shot up 9.2% to £33.18 in early trading as management announced they were selling the bank’s unsecured consumer-lending arm Everyday Loans. Secure Trust will receive £107 million cash for the business if the deal closes in early 2016 as expected as well as £20 million worth of shares in the acquirer, Non Standard Finance (NFS).
The proceeds will be invested in Secure Trust’s point-of-sale and small business lending operations. The bank’s focus on secured assets means that it is reducing its exposure to higher margin lending.
Everyday Loans has a £1 billion loan book and charges a huge 74.4% interest to reflect the risk the bank takes in unsecured lending.
Secure Trust estimates that it will make at least £115 million post-tax profit from the sale after buying Everyday Loans for £1 in June 2012 in a deal that included performance-related payments.
The sale strengthens Secure Trust’s chances of withstanding a spike in bad debts if another financial crisis hits. Capital buffers will improve by 120%, if the deal is approved by shareholders and the regulator, to a massive 28% core tier 1 (CET1) ratio, a measure of a bank’s reserves against its risk-weighted assets.
Non Standard Finance’s shareholders were not as impressed with the agreement as Secure Trust’s owners, especially as it is paying £108 million debt under the terms of the deal. Shares fell 4.7% to 89.5p.