Professional buy-to-let specialist OneSavings Bank (OSB) results for 2017 have bettered market forecasts across the board. However, on Thursday its shares are down 4% to 389.8p due to rising costs that are likely to lead to earnings downgrades.
For its year ending 31 December 2017, the bank’s underlying pre-tax profits beat market predictions by 3.2% coming in at £167.7m. Net interest income was a 1.5% beat at £245.4m while loan growth bettered forecasts by 2.8% at £7.3bn.
However its forecast net interest margin, a key indicator of a bank’s profitability, is around 3% which is less than it reported for 2017.
The bank says this is reflecting ‘current asset pricing and an expectation of a rising cost of funds after the end of TFS [Term Funding Scheme]’. The latter was a Bank of England initiative allowing banks to borrow money close to the central Bank’s own low rate of interest which OneSavings Bank made good use of.
TFS is now ended so costs will rise and the cost to income ratio for 2018 is forecast to be around 30% due to the ‘the significant increase in the cost of regulation and planned investment in the business to support our growth strategy’.
In fact, the £7m earmarked for regulatory projects in 2018 is double the amount spent in 2017 and this impact its earnings.
WHAT DO RISING COSTS MEAN FOR EARNINGS?
For Ian Gordon, analyst at Investec, he remains a OneSavings fan. He reaffirms his ‘buy’ recommendation and ‘only the finer detail of our forecasts is under review’. For a bank that made such good use of a cheap funding solution, TFS, the ending of the scheme was always going to be an issue for the company. The question is how much of an impact it’s going to have.
Liberum analyst Portia Patel says that a lower net interest margin and higher costs are likely to result in mid to high single digit downgrades to consensus forecasts.
The bank’s stellar results for 2017 included a record 22% hike in dividend per share to 12.8p and a 11% second half earnings per share beat at 27p.
As current forecasts look likely to change, looking at valuations such as price-to-earnings may be misleading especially as analysts haven’t revised their predictions yet. Using Investec’s unchanged forecasts, OneSavings trades on 6.9-times 2018’s 56.6p of earnings with a 4.4% dividend yield. If we take 6.6p off 2018’s earnings, the bank is still trading on an attractive price-to-earnings ratio of 7.8-times.
Investec’s Gordon says ‘looking ahead we welcome the fact that Onesavings has taken full advantage of the Term Funding Scheme with cumulative drawings of £1.5bn at 28 February, which provides a material subsidy to funding costs through to the fourth quarter of 2021 and first quarter of 2022’.
