OneSavings Bank will survive

Last week, the lender published its first set of full-year results since its merger with Charter Court Financial Services (CCFS). These were broadly in line with market expectations. While the combination drove OSB’s impairment ratio from seven to 10 basis points, and the cost-to-income ratio up to 29.4 per cent, pro-forma adjusted pre-tax profit rose 8.6 per cent to £381m, while the loan book climbed 23 per cent excluding structured asset sales.

However, recent performance is no longer a reliable guide for what’s to come. As analysts at Numis put it in no uncertain terms, the 2019 income statement was “solid but largely irrelevant”, given the lender’s decision to pull any reference to internal forecasts. “Whilst we entered the year with a robust pipeline, strong application levels in our core businesses and stable margins,” said chief executive Andy Golding, “it is too soon to say what the impact will be and we therefore consider it imprudent to provide forward guidance for 2020”.

But while the ultimate economic consequences from coronavirus are unknowable, but likely terrible, the speed and velocity of the sell-off in OneSavings Bank’s shares suggests that earnings will permanently collapse, and fresh capital will be required to plug the balance sheet. We think there are solid reasons to believe that the lender can weather the storm, and that its shares will eventually recover.

For one, the group is well capitalised. The combination with CCFS resulted in a fair value uplift to OSB’s assets, and a common equity tier-one capital (CET1) ratio of 16 per cent at the end of December. As such, the bank’s capital base has been designed to weather a significant deterioration in credit conditions and loan quality. CET1 funds of £1.34bn would need to more than halve, or risk-weighted assets of £8.38bn would need to more than double (or an equivalent combination), for OSB’s capital buffers – equity bonds known as AT1 securities – to be triggered.

Then there is the bank’s asset base, which is dominated by higher-interest buy-to-let mortgages secured against residential properties. Fortunately, past lending has been prudent, as a loan loss ratio of 0.1 per cent attests. And with just 3 per cent of its residential mortgage book and 2 per cent of buy-to-let mortgages above a loan-to-value ratio of 90 per cent, the loan book is not overly geared.

Potential investors can also put some faith in government measures to soften the blow on both borrowers and tenants. The UK Treasury has already moved to protect the salaries of workers laid off because of the coronavirus. And should landlords require mortgage payment holidays, OSB’s revenues should still accrue and defaults can be avoided. In other words, the business is not facing the type of income abyss that many consumer-oriented industries are currently facing.

Finally, the bank can lean on its sector-leading cost base, thanks to its investments in technology, falling management expenses, its back-office operations in India, and a raft of synergies from its tie-up with CCFS.

For the table below, we have used the most pessimistic forecasts we could find, which reflect the analysts’ own assumption of “a deep recession in magnitude, if not duration”. It’s worth noting that some analysts still expect dividends in 2020 and beyond – which arguably better reflects OSB’s own decision to announce a final distribution of 11.2p a share.