Challenger bank OneSavings Bank (OSB) has raised its loan book growth expectations from ‘at least high-teens’ to 20% for the full year in a statement today, prompting investors to bid up the shares by 4.6% to 415.6p.

Long term OneSavings fan Investec analyst Ian Gordon says that his existing earnings per share estimate of 25.7p for the second half is around 5% above market expectations. He says ‘we would now expect that gap to close’ following today’s statement.

The bank’s lending grew by 17% for the nine months to 30 September with loans and advances growing by £997m to £6.9bn during the period.

The Kent-based lender focuses on the professional landlord market. Given tax and regulatory changes to the buy-to-let rules announced last year this now appears a wise move.

The sector is less attractive to private landlords given the changes, despite amateur investors historically having a large chunk of the market.

Surplus cash

Liberum analyst Portia Patel expects OneSavings surplus capital to reach 7% of the share price by year end. Although management is seeking acquisitions, Patel predicts a special dividend above the 25% ordinary payout if these don’t materialise.

With the bank’s common equity tier one standing at 13.7%, a buffer against economic shocks, this is well ahead of its 12% target. The implication is that the bank will increase its dividend per share to 20p by 2019 according to Investec’s Gordon. This implies a 4.8% dividend yield.

OneSavings is ‘too cheap’ according to Gordon. The bank is trading on 8.3-times 2017’s forecast 49.8p of earnings.

However, Numis analyst James Hamilton views that the bank’s 2017 earnings are at the top of the cycle and credit quality will decline. Hence he expects the share price to fall and gives the bank a ‘reduce’ rating.

The structural changes to the buy-to-let market have been a boon for OneSavings. There may be question marks over how long the market will remain buoyant but on Liberum’s 2-times price to book for a 26.5% return on equity forecast, it is arguably a compelling proposition.

Especially now that another major challenger bank Aldermore (ALD) is being taken over by South Africa’s FirstRand, assuming shareholders vote in favour of the deal.

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account.

Issue Date: 08 Nov 2017