With the shares up almost 3% this morning it seems that the market welcomes the positive-looking interim results figures from OneSavings Bank (LSE: OSB).
The firm continues to make good progress with underlying earnings per share lifting just over 22% compared to a year ago and 10% growth in the loan book. The directors expressed their confidence in the outlook by raising the interim dividend 21%.
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OSB is one of a breed of new so-called challenger banks operating in the UK and started trading during February 2011. The founders set up the firm to target what they identified as “under-served market sub-sectors that offer high growth potential and attractive risk-adjusted returns.” That means lending to the private buy-to-let market, providing commercial and semi-commercial mortgages, delivering residential development finance, and dealing in bespoke and specialist residential lending and secured funding lines.
The company funds its lending with retail savings through its well-established Kent Reliance brand via online, postal and branch operations. It’s a classic banking set-up where incoming savings fund outgoing loans and the bank pockets the difference in interest rates.
Chief executive Andy Golding reckons the firm has performed well despite “significant” regulatory and tax change affecting the buy-to-let market during the first half of the year. Despite the changes, which seem to make buying and letting properties less financially attractive for individual landlords, Mr Golding says application levels in the core businesses for the third quarter “remain strong”. He thinks the firm’s focus on “professional landlords” will soak up buy-to-let landlords switching to that sector. Indeed, the tax treatment of landlords carrying out their activities through limited companies looks kinder and I reckon many will make the change.
The company expects percentage growth in the loan book to run in the high teens for 2017. Meanwhile, City analysts following the firm predict a 14% increase in earnings this year and 8% during 2018. That’s decent progress, and at today’s share price of 400p you can pick up some of the firm’s shares for a forward price-to-earnings ratio of 7.8 for 2018. The forward dividend yield runs just over 4% and forward earnings look set to cover the payout more than three times.
I think that challenger banks such as OSB, free from legacy issues and with entrepreneurial cultures and directors, have a far better chance of thriving than the old-guard dinosaurs such as Barclays (LSE: BARC). In fairness, Barclays told us in June with the interim results statement that its restructuring in the wake of last decade’s financial crisis is complete and the business is now “radically simplified.”
However, the firm is still working through past conduct issues and it is still a lumbering beast of a business that seems unlikely to beat the likes of OSB when it comes to growth. City analysts following Barclays reckon earnings will rebound 36% during 2017 and 28% in 2018, but I think the firm will struggle to grow earnings at a double-digit clip beyond that, so I’d rather take my chances with OneSavings Bank.