OSB rides rate wave

The banking sector can mainly thank the Bank of England (BoE) for rescuing the bottom line this year as interest rate rises start to feed through into net interest margins. A good example are the high street behemoths who, despite struggling with high costs, have delivered decent results so far this season. So it follows naturally that an institution that is specialised, with low running costs, can outperform its larger peers, which is precisely the story of lender OSB’s (OSB) first-half results.  

OSB received the full benefit of the Bank of England’s change in rate policy and its net interest margin rose by nearly 50 basis points to 2.80 per cent as rising rates filtered through. That sent cash cascading through the income statement and helped to drive down OSB’s already low cost-to-income ratio by three percentage points to 25 per cent.

In terms of its other key statutory numbers, last year’s £100mn share buyback scheme left the CET1 ratio for risk-weighted assets slightly lower at 18.7 per cent. The Greater London weighting of its loan book – 39 per cent of all loans are to borrowers in the capital – meant OSB benefited from continued low loan delinquency rates, which resulted in a £15mn release from capital set aside to cover bad debts. Management did say that the outlook for the economy was uncertain, but that there no signs of current stress in its book.

With a hefty rise in the dividend, OSB still remains a solid pick for income investors who want to broaden their exposure to financial shares. Broker Numis forecasts EPS of 89.5p for 2022, giving a sector average price/earnings ratio of barely six. Buy.

Last IC View: Buy, 527p. 26 May 2022