Join our community of smart investors

OneSavings offers quality at a discount

The alternative lender has improved lending guidance for the second time this year
November 22, 2018

Targeting professional landlords has propelled loan book growth for OneSavings Bank (OSB), prompting management to improve 2018 guidance for the second time this year. Importantly, there are few signs that growth has been achieved at the cost of credit quality, with the average mortgage loan-to-value ratio below 70 per cent and impairments running at historically low levels. Nevertheless, the shares have been depressed by concerns over Brexit-related macroeconomic uncertainty and a potential deterioration in house prices, leaving OSB valued well below its historical average. We don't think the level of that discount is justified given the quality of OSB’s lending operations.

IC TIP: Buy at 346.6p
Tip style
Value
Risk rating
High
Timescale
Medium Term
Bull points

Shares trading at historical discount

High return on equity

Improved loan growth guidance

High dividend yield

Bear points

Large buy-to-let concentration 

Housing market slowdown risk

The loan book rose 16 per cent during the first nine months of the year to £8.5bn, as £730m in new loans were written. Management expects full-year lending growth of more than a fifth, which is ahead of the high-teens growth guided to when first-half results were released in August. That is despite increasing competition for five-year fixed-rate buy-to-let mortgages.

Concentrating on the professional buy-to-let investors has helped the alternative lender to outperform the wider market, which has contracted since the increase in stamp duty land tax on second homes in 2016 and the withdrawal of mortgage interest tax relief a year later. Landlords applying for a mortgage with the main buy-to-let Kent Reliance brand via limited companies – which can still claim tax relief – accounted for 71 per cent of overall applications during the first half, up from 69 per cent in the prior year.      

Impairments also remain historically low at just 0.11 per cent of the loan book during the first half. That is slightly higher than the 0.04 per cent recorded at the same time in the prior year – which benefited from enhanced indexing of property values – but it is below the 0.16 per cent, 0.23 per cent and 0.33 per cent rates in 2016, 2015 and 2014, respectively. Admittedly the loan book is not well diversified, with buy-to-let mortgages accounting for 80 per cent of loans at the end of June. However, comfort can be taken from the weighted average loan-to-value ratio for mortgages of 65 per cent.

The return on equity remains impressive, hitting 26 per cent during the first half. Meanwhile, the common equity tier one ratio was 13.3 per cent, ahead of a 12 per cent target. That bodes well for the group’s dividend-paying ability – the shares offer a potential yield next year of 4.7 per cent at the current price. What’s more, with JC Flowers selling most of its remaining holding in May, the potential drag on the shares from the investment firm’s persistent sales is no longer an issue.

ONESAVINGS BANK (OSB)   
ORD PRICE:346.6pMARKET VALUE:£847m
TOUCH:346.4-347p12-MONTH HIGH:454pLOW: 339p
FW DIVIDEND YIELD:4.7%FW PE RATIO:5
NET ASSET VALUE:254pLEVERAGE:15.7
Year to 31 DecTotal operating income (£m)Pre-tax profit (£m)Earnings per share (p)*Dividend per share (p)*
201516310534.18.7
201620116349.410.5
201723816851.112.8
2018*28219157.414.3
2019*32121564.616.2
% change+14+13+13+13
Normal market size:1,500   
     
Beta:1.01   
*Investec Securities forecasts, adjusted PTP and EPS figures