OSB shows the downside of interest rates

Shares in specialist lender OSB Group (OSB) rose slightly on results day as the market digested a poor profit performance, while at the same time being relieved that the adverse effective interest rate (EIR) adjustment the company had announced earlier in July was within the forecast range of between £160m and £180mn, albeit topping out at £180.7mn on an underlying basis. Fears that a higher adjustment rate could have had a further cascade effect on the income statement were behind the heavy price falls in July. In the event, profits were slashed but within the range that many analysts had forecast, hence the more positive market reaction.  

The EIR adjustment came about because the buy-to-let investors who make up the majority of OSB’s loan book decided en-masse to refinance their loans quickly once their teaser rates had expired, meaning less time spent on higher rate band than OSB had expected, forcing it to book a charge to the income statement. The resulting lower income also meant that the bank’s key underlying cost ratio to nearly 40 per cent.

The moderation in house prices mean that loss ratios were also higher, with this measure increasing by 36 basis points by the end of the half. The net interest margin was down by almost a whole percentage point to end at 2.03 per cent. Despite these issues, the loan book continued to grow and was 4 per cent higher at the period end at £24.5bn.

Broker Numis has OSB at a forward price/earnings ratio for this year of 8.4, falling to 5.2 for 2024. Hardly expensive, but the interest rate adjustment could persist for a while. Hold.

Last IC View: Buy, 522p, 16 Mar 2023