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This UK recovery stock is shooting higher on today’s news

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The Secure Trust Bank (LSE: STB) share price burst into life again at the beginning of March. And today’s move higher continues that trend. It’s up more than 5% this morning on the release of the full-year results report.

It may be tempting to jump into this UK recovery stock today, but I’m cautious. With the share price near 1175p, it’s already more than 100% higher than it was last July at the bottom of its coronavirus plunge. So much of the recovery from the crisis could already be in the bag. And prior to the arrival of Covid-19, Secure Trust Bank had been locked in a downtrend since the end of 2015.

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I’m wary of this UK recovery stock’s cyclicality

A year ago, I said the company looked like a fast-growing, new-generation, disruptive competitor in the UK banking sector.” And the valuation had become too rich perhaps because of that perception. So I saw the long downtrend in the share price as a well-deserved unwinding of the valuation premium. And the coronavirus plunge in the markets last year just finished off that move.

Now, the company is valued more like a bank should be. After all, it’s just another banking company, not too dissimilar from others such as Lloyds, Barclays, NatWest and others. And the one overriding feature of bank companies is they operate perhaps the most cyclical businesses in which we can invest. Although, in fairness, prior to the pandemic, annual earnings had been rising fast.

I reckon bank valuations should look modest when the profits of the underlying business are big and growing. We never know when the next down-leg will arrive. So it makes little sense for valuations to rise just because profits are growing each year. And in the period between the financial crisis and the coronavirus crisis we saw the reverse — bank valuations declined as profits grew.

Poised to return to growth

Today’s numbers from Secure Trust Bank show that earnings per share declined by just over 48% in 2020. However, the directors increased the shareholder dividend by 120% to 44p per share. The bank said the first lockdown last year caused the balance sheet to shrink. But growth in the final quarter led to revenue similar to 2019 levels.

The reduction in customer numbers was modest at 3.9%. But total new business lending volumes fell by just over 27%. However, the income statement shows that much of the profit decline occurred because of impairment charges. The company tried to estimate the financial effect of the deterioration of the UK economy “prior to the recovery from the pandemic.”

One positive is the firm’s capital ratios improved in the period. For example, the total capital ratio moved from 15% in 2019 to 16.4%. And, looking ahead, the company reckons its diversified business model and capital strength will help the business withstand further short-term uncertainty. Meanwhile, the directors are “looking forward with confidence” to the business returning to lending growth.

The forward-looking earnings multiple for 2020 is just below 12. And the price-to-book value is around 0.8%. I think that valuation looks full for a bank. So I’m watching from the sidelines even though the company could be poised to return to multi-year, fast-paced earnings growth.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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