OneSavings Bank (OSB) has had to deal with the triple whammy of stamp duty changes for buy-to-let landlords, referendum-induced uncertainty and a cut in the Bank of England base rate. While the challenger bank's shares have recovered solidly since the end of June, the cumulative effect of these shocks has meant the share price is still down more than a quarter year on year. However, the slump has yet to be justified by a slowdown in demand for the bank's loans. In fact, last week the bank reported £510m in organic loan applications in the three months to the end of September. We reckon concerns about the bank's growth prospects are overdone, with risk already well priced in. With the shares now trading at a large discount to their historical average, we recommend buying.
- Shares at a discount to historical average
- Superior returns on equity
- Strong loan book growth
- Growing dividend yield
- Buy-to-let risk
- Potential interest rate pressure
OneSavings Bank lends primarily to small- and medium-sized businesses (SMEs), buy-to-let landlords and residential homeowners. Lending to the buy-to-let and SME sectors has delivered the strongest growth in net interest income (NII) so far this year. During the first six months of the year, NII for this segment was up by almost half to £61m year on year. This was because gross loans to these customers increased by more than a third to £3.5bn during this period. The bank increased its organic lending by a quarter to £800m during the first six months, in particular in buy-to-let through the Kent Reliance and InterBay brands. With strong demand continuing during the third quarter, growth in net loans and advances has reached £466m over nine months, taking the total to £5.6bn.