Bank on OneSavings

Continued demand for buy-to-let and lending to small- and medium-sized enterprises (SMEs) has meant OSB’s loan book has almost doubled during the three years to the end of June 2017, the period it has been a public company. Buy-to-let lending – which made up almost 65 per cent of the gross loan book at the end of June – increased by almost a fifth during the first six months of the year. That was despite a spike in demand during the first quarter of last year, ahead of the introduction of tax relief changes in April. However, overall market volumes were down almost a quarter during the period, according to the Council for Mortgage Lenders. So it seems that concentrating on professional landlords has helped insulate OSB against some of the impact of the regulatory changes. Demand from SMEs meant commercial lending was also up 13 per cent year on year to £303m.

Investec analysts expect the bank’s total loan book to increase by a fifth this year and 14 per cent in 2018 (see chart). Analysts have been encouraged by record organic loans of £677m during the third quarter of this year, compared with £510m at the same time in 2016.

What's more, the expansion in the loan book has not been done at the cost of the balance sheet’s strength. OSB has been gradually reducing its leverage, particularly following the disposal of mortgage securitisation business Rochester Financing. Its common tier one equity ratio – as a proportion of risk-weighted assets – increased to 13.7 per cent, from 13.3 per cent in the prior year. That’s against a target of 12 per cent. Analysts at Investec reckon this healthy capital level could pave the way for an increase in the dividend payout rate, which is set at 25 per cent of underlying profit after tax. Investec forecasts a gradual rise to 35 per cent by 2019.  

It has also been reducing second-charge mortgage lending in parts of the market that it reckons were not fully pricing in risk. The average loan-to-value ratio of its buy-to-let customers was also a conservative 69 per cent at the end of June, and just 58 per cent for its residential mortgages. It also has minimal exposure to high-value London property, with only 2 per cent of its loan book secured against properties worth more than £2m and with a loan-to-value above 65 per cent.

The share price took a knock in October after major shareholder JC Flowers sold down part of its stake in the challenger bank, and the private equity firm retains a 21.5 per cent holding, which is in lock-up until next year. And shareholders should take further comfort from the fact that the share price rebounded to above the level it was trading at the day prior to the last sell-down on 3 October. The existence of such a large holding could even increase the chances of a takeover.