Challenger bank and mortgage specialist OneSavings Bank (OSB) has upgraded its growth forecast for its loan book on releasing its first half results.

However despite posting a 17% hike in pre-tax profits to £91.8m, the bank’s share price falls 2.4% to 432.8p. Investors may be concerned with other metrics the bank released today, for instance its net interest margin (NIM) declined 23 basis points to 3.01%.

Net interest margin is the difference between interest paid for funds and interest received by customers. For a company engaged with mortgages that charge interest, it is a key measure of its profitability.

The bank attributes this drop in NIM to lower yields on new mortgages issued amid rising levels of competition in the sector. This intensifying of competition and resulting lower yields on offer comes despite the Bank of England raising interest rates recently (which should increase mortgage costs).


Another potential concern is the company's declining common equity tier one (CET1) ratio. OneSavings' CET1 has dropped to 13.3% from 13.7%, which is not a huge decline, yet this capital is what a bank has set aside to deal with economic shocks.

James Hamilton, analyst at broker Numis, paints a rather bleak picture of what would happen to OneSavings if customers started defaulting on their mortgages similar to the situation in the early 1990s.

He says that with a 10% default rate OSB’s CET1 ratio declines to a ‘manageable, if uncomfortable 10.5%’, before adding ominously ‘anything worse and it is likely that OSB becomes effectively insolvent’.


While there may be some concerns with the housing market which is OneSavings Bank's key sector, some fans of the company view these results as outstanding.

Ian Gordon, analyst at Investec, enthuses ‘today [Thursday] results have knocked volume expectations out of the park, with guidance for loan growth raised (yet again)’.

Gordon adds the company’s new business originations performance ‘appears relentless’ clocking up £755m in the second quarter to 30 June alone.

OneSavings has enjoyed a great run and despite today’s slight wobble the bank is still solid. Using Investec’s forecasts, the bank is trading on 1.5-times its net asset value (NAV) for 2019.

While not cheap against its sector average of 1.1-times NAV, the bank’s forecast return on equity is 23.6% for 2019. For comparison, HSBC (HSBA) is targeting a return on equity of 10% in the medium term (by 2020).

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Issue Date: 23 Aug 2018