OneSavings Bank surges as interim profits grow faster than expected

Half-year profits from OneSavings Bank were higher than the market expected despite management significantly boosting liquidity ahead of the Brexit referendum.

Loan origination of £973m in the six months to 30 June was up 25% on the same period last year, lifting underlying loan book growth 10%, excluding the disposal of an interest in a securitisation.

Adjusted pre-tax profits grew 36% to £64.6m, well ahead of the analysts consensus of £60.3m, with adjusted earnings increasing 27% to 19.7p versus a consensus of 17.7p.

OneSavings, which operates via the four customer-facing brands of Kent Reliance, InterBay Commercial, Prestige Finance and Heritable Development Finance, lifted net interest margin by two basis points to 3.07%, ahead of management's full year guidance and it is expected to remain broadly at this level in the second half.

Chief executive Andy Golding highlighted that this had been achieved "in spite of significantly increasing liquidity as a prudent measure ahead of the UK referendum on EU membership, and whilst increasing our capital ratio following the sale of our economic interest in the Rochester Financing No.1 securitisation".

The cost to income ratio increased by one percentage point to 27% but was lower than we expected in part due to a smaller FSCS levy provision, while the underlying return on equity of 29% also remained strong despite the impact of the government's new bank corporation tax surcharge.

The core Tier 1 ratio increased by 1.7 percentage points to end the period at 13.3%, helped by the securitisation disposal.

Given current uncertainty, OneSavings has tightened the lending criteria in smaller business lending and is taking a "more cautious approach" when assessing portfolio purchases, but loan applications in the core business in the initial weeks of the second half were said to be "significantly higher" than the first half run rate.

Golding said he also saw "potential upside opportunities" for further accretive loan pool acquisitions due to the reduced competition in this area.

On Brexit he said it was too soon to predict the impact of Brexit on the UK economy, but felt the bank was well placed: "We will continue to concentrate on what we have proven we do best; using our broker relationships, manual underwriting expertise and secured lending strategy to lend responsibly to customers in underserved markets".

Broker RBC Capital Markets upgraded the OSB's shares as the bank's implied all-in return is now 26% alongside the 4% dividend yield, making it one of the highest in its sector coverage.

"The increases to our forecasts are sizable; we increase our underlying diluted EPS forecasts by 9% in 2016, 6% in 2017 and 3% in 2018; book value per share estimates move 2% to 3% higher in each year as well," analysts wrote, noting that the increases to forecasts are the result of the results and management’s guidance that is more optimistic than was envisioned.

RBC said these forecasts continued to assume a moderation in the net interest margin, an increase in the cost-income ratio, a near doubling of the impairment ratio, slowing loan book growth, and a material decline in the return on equity.

Broker Shore Capital said the underlying return on equity of 29% was the strongest among the quoted specialist banking peer group and "well above" any reasonable estimate of the cost of equity.

But ShoreCap's analysts did not anticipate making significant adjustments to current full year earnings estimates but expect to put through "sizeable downgrades to future years earnings to reflect the impact of greater UK economic uncertainty and a lower-for-longer interest rate environment" as consistent with the approach for peers but still expect to model earnings growth, "albeit at a much slower rate than previously".

Shares in OSB surged 11% to just over 263p by 1130 BST on Wednesday, their highest level since the day of the Brexit result.