Charter Court-OneSavings merger gets warm welcome from analysts

The pair on Monday confirmed reports over the weekend that deal would be structured so that OSB would end up with 55% of the enlarged group and its chief executive Andy Golding would be in charge.

Investec said Golding was "highly regarded" and while both banks offer strong performance metrics on a stand-alone basis, "we believe that the combination should prove materially value-enhancing for both sets of shareholders".

The South African bank said the current valuation metrics, both little more than five times 2020 forecast earnings per share, "make absolutely no sense to us, and we expect the proposed combination to provide a suitable catalyst for an overdue re-rating".

Investec reiterated its 'buy' rating.

Analyst Gary Greenwood at Shore Capital said the proposed combination was "relatively unsurprising given the strong similarities" and the terms "appear reasonably sensible" as he see similar around 50% upside to fair value for both stocks.

Greenwood saw execution risk of a merger as "relatively low", given the similarities between the two organisations and the fact that the deal appears to have been proposed on friendly terms.

"We see the likelihood of an interloper or alternative bidder for either company appearing as being low."

With both OSB and Charter Court operating in the "very unfashionable and unloved" BtL mortgage space, analysts at Numis saw strong potential for synergies even though both are growing rapidly and both have market leading levels of operating efficiency.

"While this may lead the reader to conclude that there would not be significant cost synergies we observe that they address the market in a different manner (Charter Court digitally, OSB manually) and have slightly different cost strengths (OSB does much of its processing in India)."

Numis, also reiterating its 'buy', sees the deal creating value with synergies, such as "Charter Court applications that cannot be underwritten digitally could be passed to OSB to manually review, and initial OSB applications could pass through the Charter Court model with many not needing manual oversight."

Numis added that OSB’s asset yield is double that of Nationwide, its cost-to-income ratio is near half that of Lloyds, its impairment charge is similar to Nationwide and less than half that of Lloyds, while its loan book growth was ten times that of Nationwide and nearly 18 times that of Lloyds.

Peel Hunt also saw benefits for an enlarged group that would size of the combined loan book of around £15bn, with a buy-to-let book of over £11bn and potential for further cost synergies.

Although each already operate with best-in-class cost-to-income ratios of circa 30%, Peel Hunt said "this could improve further given OSB’s back-office capacity in India" and a combination would result in a CET1 ratio well ahead of the minimum, with the potential to grow the loan book "comfortably" in the medium term, with the potential added benefit of an IRB accreditation in the next few years.