Charter Court and OneSavings Bank confirm recommended merger

The deal will be effected by means of a scheme of arrangement with each Charter Court shareholder receiving 0.8253 new OSB shares, giving Charter Court shareholders 45% and those of OneSavings 55% of the enlarged group.

Both lenders also announced annual results on Thursday, with Charter Court declaring a 12.7p dividend and OneSavings a payout of 14.6p, and said shareholders will also be entitled to receive their company's interim dividends later in the year without any reduction in the consideration, if the merger has not completed by then.

The pair said the enlarged group would pay out at least 25% of profits as dividends, with deal looking to remove £22m of annual costs, with 10% of the cost synergies expected to be recognised in the first 12-month period following completion.

OSB has received irrevocable undertakings from the Charter Court directors and activist investor Elliott to vote in favour of the scheme of arrangement, covering around a third of Charter Court's shares, and has received letter of intent from Merian, the largest shareholder in OSB and second largest in CCFS.

As announced at the start of the week, chief executive of the combined group will be the well regarded OSB boss Andy Golding, who will keep his CFO, while Charter Court's Malcom Williamson taking on the chairmanship. Charter Court CEO Ian Lonergan will head up the integration project with his CFO Sebastian Maloney being retained in an advisory role for the next twelve months. Charter Court's Peter Elcock will head up the combined group risk function.

OSB’s full-year results showed pre-tax profits up 15% to £193.6m, which, along with the dividend, was ahead of analysts’ expectations. The loan book increased 23% to £9.0bn.

There were two drivers of the better than forecast results, with net interest margin falling less than expected to 3.04% from the 316bps reported for 2017, against company guidance of 300bps.

Charter Court PBT was up 41% to £158.2m as the loan book grew 24% to £6.7bn. NIM dropped to 3.08% from 3.19%.

"Results highlight the strengths of these banks and we see value in this merger given the combination offers scale benefits in complementary secured lending classes with additional benefits in funding sources and operational efficiency," said broker Peel Hunt.

Shore Capital said: "We view the combination of these two companies on a nil-premium basis as being sensible, given our standalone fair value for CCFS of 460p and OSB of 560p show broadly similar (41-42%) upside from the current share prices. We expect that merger synergies will be additive to these valuations."

Russ Mould at AJ Bell noted that the pair's NIM compare well to other banks.

Of the FTSE 100 Big Five, Barclays has a NIM of 3.23%, Lloyds 2.93%, RBS 1.98%, HSBC 1.66% and Standard Chartered 1.58%. Of the challengers, Secure Trust Bank has a standout NIM of 7.60%, and Charter Court and OSB stand above Paragon Banking at 2.21%, Metro Bank at 1.81% and CYBG at 1.72%.

"At its core, banking is a simple business," Mould said. "The bank raises funds at a certain cost and then lends those funds out at a higher interest rate, pocketing the difference as a profit. This is, in effect, net interest income. The banks can also generate earnings through fees (as they do via say wealth management, private banking or insurance) or commissions and trading (via investment banking) but at their core it is lending that matters. If you cannot get this right, then you should not be in the business."

While analysts and banks had expected NIMs to rise as interest rate rise, the BoE has held rates at rock bottom for years, hitting margins amid higher funding costs on one side from competition over deposit rates to attract customers and the loss of the cheap Term Funding Scheme cash last year, plus greater wholesale costs.

Mould said the planned merger may be partly designed to combat this trend, as the combined entity will have greater scale and thus may be attract funding more cheaply as a result, to the benefit of its net interest margin, as both OSB and CCFS are both already very lean on a cost basis, even if management believes cost synergies will be released by the planned merger.