OneSavings Bank rallies on RBC upgrade to 'outperform'

OneSavings Bank rallied on Tuesday as RBC Capital Markets upgraded the stock to ‘outperform’ from ‘sector perform’ and lifted the price target to 355p from 305p on higher forecasts and lower cost of equity.

The bank said its downgrade of the stock to ‘sector perform’ last month was premature and based on overly conservative estimates.

“Our downgrade was not based on anything wrong with OSB (to the contrary, we indicated that OSB ‘continues to grow and to perform,’ but we noted ‘recent share price performance’). Now, based upon our increased forecasts and price target, we believe the shares are once again set to outperform.”

RBC reckons OSB can grow its earnings per share by 16% in 2016 and then a further 12% from 2016 to 2018.

The bank said growth could be higher still if the net interest margin and cost or risk show greater stability than it assumes.

It said the optionality offered by the balance sheet is significant, with its forecast of a Core Tier 1 ratio rising to over 15% by year-end 2018. As a result, it sees a good chance OSB will look to make selective acquisitions and/or increase returns to shareholders.

“It is our opinion that our higher forecasts present an achievable picture of the company’s growth trajectory because we continue to assume a moderation in the net interest margin, an increase in the impairment ratio and slowing loan book growth.”

At 0943 GMT, the shares were up 5.7% to 332.90p.