Buy OneSavings challenger bank

Source: CML

Last year OneSavings Bank more than doubled its underlying pre-tax profits on the back of this red-hot market, as it grew its loan book by 29 per cent to £3.9bn. Just over half of that lending is to buy-to-let landlords, and commercial and residential developers. Residential mortgages - predominantly in London and the south-east - make up most of the rest. The company mainly sells mortgages via specialist brokers, independent financial advisers and its Kent Reliance business. Kent Reliance, which has a network of branches in the south-east of England, also offers personal savings products and grew retail deposits by a third in 2014 to £4.3bn, which kept the loan-to-deposit ratio below 100 per cent, in line with OneSavings' aim to rely primarily on retail funding.

There are solid grounds to expect the impressive growth to continue at OneSavings. Aside from the strength of the buy-to-let market, the company is also benefiting from the long-running trend of retrenchment from areas of the credit market by big banks. In March, for example, OneSavings bought £251m-worth of second-charge mortgages from a "global financial services organisation" that stopped originating such loans in 2008. The deal prompted broker Canaccord Genuity to increase its EPS forecasts for the current year by 5 per cent and 10 per cent for 2016. The bank is also considering new lending opportunities, such as asset financing, which is benefiting from the growing appetite for credit from small businesses. This has already proved a boon market for rival Close Brothers (CBG).

Importantly, growth is being built on a solid base. At 28 per cent, the bank's cost-to-income ratio last year was the lowest among its immediate peers, and helped there by OneSavings' low-cost processing operation in India. The tier one capital ratio improved from 8.4 per cent to 11.4 per cent last year. And the bank should be resilient against moderate house price falls, given that its average loan-to-value across its mortgage book is 62 per cent, and this profile has improved with the credit environment.

There is speculation that the lender's private equity backer, JC Flowers, is looking to offload some of its majority holding. We would not expect a disorderly sale, but the prospect of a disposal could weigh on sentiment all the same. That said, the presence of a large shareholder potentially makes OneSavings Bank a more likely takeover target in light of Banco de Sabadell's swoop for TSB.