OSB bucks the banking trend

It is cruel fortune that OSB’s (OSB) results came right in the middle of the biggest disruption to the global banking sector the market has experienced in 15 years. But what could have been awkward timing turned out to be an opportunity to showcase the specialist lender’s strengths, particularly the considerable amount of capital that the company will return to investors this year. When the £150mn share buyback, a £50mn special dividend and an enhanced regular dividend are taken together, investors will receive an impressive total return of approximately £330mn for the year. The market certainly took notice and sent the shares markedly higher on the day.

With its focus on the south-east of England and buy-to-let markets, the lender managed to take full advantage of interest rate rises to record a net interest rate margin of 3.03 per cent, up from 2.82 per cent in 2021, on a loan book that expanded by 12 per cent to £23.6bn on a statutory basis. The bank’s other key ratios came in on cue, with costs marginally higher at 27 per cent while the core tier 1 ratio was a healthy-looking 18.3 per cent. The one area of significant change was the much higher charge for expected loan provisions (expected credit loss), which rose to a net £27.7mn for the year as management pointed to significant economic uncertainty for the UK this year as a reason for putting capital aside to cover higher potential losses in the loan book.  

OSB is currently valued at a forward price/earnings ratio of 5.1 times Panmure Gordon’s earnings per share (EPS) forecasts for 2023, still a discount to an already cheap banking sector. The impression remains that the market is discounting the macro environment, while undervaluing OSB’s operational performance. Buy.

Last IC view: Buy, 526p, 11 Aug 2022