No divi yet from OneSavings Bank – but it could return in six months’ time. Hold
The buy-to-let lender is holding up well in spite of the numerous challenges that all banks face, writes Russ Mould
WHO on earth would want to be a bank right now? The Western world is already heavily indebted. Regulation is tight. The economic fallout from the pandemic raises the prospect of bad loans and lower earnings. To cap it all, central banks’ policies of low interest rates and quantitative easing are crushing profit margins on loan books. It is an unremittingly grim picture.
And yet banks come with one saving grace: none of this is new and it can therefore be argued that valuations already reflect this treacherous environment, especially after a period of terrible performance.
For the record, the banks sector is the third-worst performer in the FTSE so far this year, after a 47pc fall; only oil and gas producers, and automobiles and
parts, trail behind.
OneSavings Bank, first assessed by this column at 341p in November 2018, therefore represents a bit of a conundrum. We have made a small paper loss (albeit one ameliorated by dividends received) on a stock that lies in a sector beset by bad news.
Yet its £1.3bn market value represents a discount to net asset value of £1.6bn, so the shares are already cheap and sentiment depressed amid concerns over what will happen to the housing market once the furlough scheme begins to unwind. OneSavings Bank, in the eyes of some, effectively doubled down on the buy-to-let mortgage market when it merged with Charter Court Financial Services last year.
Better still, last month’s interim results were better than analysts had predicted, not least because the bar for expectations had been set low thanks to the prevailing gloom. Granted, net interest margins fell and the underlying loan loss ratio rose to 0.6pc from 0.1pc. But the loan book grew by 2pc and costs were reined in with the result that underlying pre-tax profits fell by just 14pc, no mean achievement against this economic backdrop.
OneSavings also remains extremely well capitalised, with a “common equity tier one” ratio of 17.4pc. That should allow the bank to withstand any buffeting it gets from the housing market, where the latest data on mortgage applications and price rises offer grounds for encouragement anyway, rather than the opposite.
Just like 2019’s final dividend, this year’s interim was passed, but
management will take a fresh look alongside the full-year results. Analysts are pencilling in a divi of 8.33p a share and that could be one catalyst to persuade investors to revisit the stock.
Further positive signs from the economy and housing market would help too – although the opposite also holds true – so the combination of OneSavings’ lowly valuation and wellbuttressed balance sheet means we shall remain loyal for now.
Value stocks such as this remain resolutely out of favour, as technology and growth names continue to run riot, but we shall stay patient. Hold.