- Challenger bank warns on net interest margins for the second half
- Lender cites competition in the mortgage market
- News overshadows strong first half, dividend increase and new buyback
- Shares continue to trade at a discount to net asset value
“A second summertime profit warning from OSB is hitting its shares hard, although the other challenger banks do not seem unduly concerned for now, even if the lender is citing competition in the mortgage market and pressure on net interest margins as the source of the lowered profit guidance for the second half of this year,” says AJ Bell investment director Russ Mould. “The latest alert overshadows a healthy improvement in first-half profits, a higher dividend and a new £50 million share buyback and although OSB’s shares look cheap on a 26% discount to net asset, or book, value, the bank will now have to work hard to prove its stock does not deserve this lowly rating after its second disappointment in a year.
“OSB owns the Kent Reliance, Precise Mortgage and Charter Savings bank brands and is a specialist in Buy-to-Let, residential and commercial property mortgages. It has a good record of growth in its loan book and deposit base, a low cost-to-income ratio and capital ratios that comfortably satisfy regulators, but this second warning is undeniably a blow.
Source: LSEG Refinitiv data
“It is also buying back stock, which makes perfect sense given the shares’ discount to book, or net asset, value – and it is that lowly rating, coupled with a single-digit price/earnings ratio and 7%-plus dividend yield that makes it tempting to revisit the stock.
“Last August shares in OSB were hit hard by a profit warning that blamed how mortgage customers had refinanced earlier than normal, forcing the challenger bank to take an impairment charge against the value of its loan book, to reflect the loss of future potential income. Markets had begun to wonder whether that had just been a blip, as nothing untoward had happened subsequently, and the shares had rallied strongly as a result in anticipation of a strong profits recovery in 2024 and beyond as lower interest rates helped the UK economy to gain some long-awaited traction.
Source: Company accounts
“However, the warning from chief executive Andy Golding that net interest margins on the loan book will come in between 2.30% and 2.40% on an underlying basis for the whole of 2024, and thus recede in the second half from the levels seen in the first, tears a bit of a hole in that narrative, despite the company’s ongoing cost discipline.
Source: Company accounts
“Even if Mr Golding and the board seem more confident in the macroeconomic environment here in the UK, the prospect of more competition in the mortgage market (and possibly for deposits too) will weigh on analysts’ earnings forecasts for this year and possibly next. A less rapid rebound in profits may now be on the cards, despite low levels of loan and asset impairments (themselves a decent sign for the economy more widely).
“Irrespective of the less positive profit outlook, the board did sanction an increase in the interim dividend and a new £50 million buyback. The forecast dividend yield of 8.5% may catch the eye of some – although others may consider this to lie in ‘too good to be true’ territory given the second summertime setback – while the buyback does make mathematical sense when the shares are trading at a 26% discount to book value.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“That could provide some support to the share price as analysts and investors digest the implications of the revised profit outlook, and the low earnings multiple and high dividend yield suggest that investors are treating analysts’ forecasts for both with a good degree of caution.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Refinitiv data
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Refinitiv data
