Where to for VUK, page-6

"fears around wage inflation and cost of risk increase but I agree it looks cheap again.
I too sold above 4 last year but am considering buying again"

I started buying today:

Because, priced at something like 0.57x book value and a P/E of 5x, it looks crazy cheap.

With interest rates rising, that will reverse the decade-long margin pressure on the banking sector.

Of course, the flip side of increasing rates is that it raises bad debt risks, but one thing that has greatly impressed me about VUK during its re-invention after being disgorged from NAB, is that it has been happy to turn away what it considered to be low-quality loans, even if that meant slower-than-potential asset growth.

VUK managers had often mentioned in the past that at some point interest rate cycle will bottom and turn upwards (Covid delayed that by a couple of years, but it is clearly happening now), and that the company's loan book quality needs to be ready for that higher interest rate world.

My sense is that VUK has been quite disciplined in taking on risk which, while resulting in some business being left on the table over the past two or three years, means that the increase in net interest margin will leverage nicely at the bottom line, in the absence of excessive credit losses.

Sure, VUK never trade at a premium-to-book (or probably not even at book value, for that matter) but there is no reason (other than irrational market behaviour) that it shouldn't go back to 0.80x or 0.85x book value, where it has traded in the past.


NTA has been impacted over the past three years [NTA history, 2016 to 2020 (pence/share): 284; 296; 260; 249; 244, respectively] by:

1.) PPI remediation charges,

2.) Covid disruptions,

3.) Related to 2.), interest rates reaching record lows which pressured bank sector margins, and

4.) Significant technology spend to modernise and digitise systems


But 1.) and 2.) are no longer with us, and 3.) and 4.) have gone from being headwinds, to being tailwinds.

Which resulted in NTA finishing FY 2021 at 290 pence/share - where it was before the extraneous travails listed above took their toll.


So I think the chance of any meaningful impairment to book value is limited, causing me to consider it a reliable base off which to value VUK's equity.

At a modest 30% to 35% dividend payout ratio (which, incidentally would translate into an appetising >6% DY, albeit unfranked admittedly ), NTA can expect to rise by around 8% [*] over the current financial year.

But, heck, even if it doesn't for whatever reason, it certainly isn't likely to suffer any further hits of the magnitude experienced between 2018 and 2020; which suggests to this observer that the current share price is well underwritten by valuation fundamentals.


[*] Derived by an increase of 23 p/share in retained earnings (DPS 11.5 p/share at 33% dividend payout on expected EPS of 35p/share) on FY2021's exit NTA of 290p. (Note: yes, Underlying EPS in FY2021 was 48 p/share but that included a 131 m pound ECL release which should clearly be treated as non-recurring)

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