OSB Group shares slide on lower margin forecast

15th Aug 2024 10:03

(Sharecast News) - Shares in specialist lender OSB Group were sliding on Thursday morning despite a robust set of first-half results, as it cut its net interest guidance for the full financial year.

The FTSE 250 company reported significant growth in both underlying and statutory profits, driven by favourable financial conditions and strategic discipline.

It now saw its full-year net interest margin coming in between 230 and 240 basis points, however, down from its previous expectations for around 250 basis points, amid increased mortgage market competition.

Its underlying profit before tax surged to £249.9m, up from £116.6m in the same period in 2023.

Statutory profit before tax also saw a substantial increase to £241.3m, compared to £76.7m in the first half of last year.

The improvement was put down to the non-recurrence of an adverse effective interest rate adjustment from the prior year, although it was partially offset by narrower margins on mortgages and deposits, as well as a shift from an impairment loss to an impairment credit.

OSB said its underlying return on equity jumped to 18%, with statutory return on equity at 17%, both marking significant increases from the previous year's figures.

The net loan book grew modestly by 1.5% on an underlying basis and 1.4% on a statutory basis, reaching £26.1bn, while originations were slightly lower at £1.9bn, reflecting the group's focus on maintaining pricing discipline and maximising returns.

Its net interest margin also improved, with the underlying figure increasing to 243 basis points and the statutory net interest margin to 237 bps, up from 203 bps and 171 bps, respectively, in the first half of 2023.

That was largely due to the favourable effective interest rate adjustment.

Operational efficiency improved as well, with the underlying cost-to-income ratio falling to 34% and the statutory ratio to 35%, down from 40% and 47%, respectively, in the same period last year.

The loan loss ratio turned positive at -4 basis points, compared to 37 basis points in the first six months of 2023, driven by updated macroeconomic assumptions, particularly in house price improvements, though arrears on loans greater than three months increased slightly to 1.6%.

OSB said its capital position remained strong, with a common equity tier 1 capital ratio of 16.2%, up slightly from 16.1% at the end of 2023.

That figure included the impact of a £50m share repurchase programme announced in March, of which £39m was completed as of mid-August.

In line with its dividend policy, OSB declared an interim dividend of 10.7p per share, up from 10.2p in the first half of 2023.

The board also approved a new £50m share repurchase programme, set to begin on 6 September.

"I am pleased with the group's performance in the first six months of 2024, demonstrating a disciplined approach to new lending, as we focused on maintaining our return on equity against a backdrop of subdued mortgage market volumes," said group chief executive officer Andy Golding.

"The group delivered 18% underlying return on equity and 1.5% underlying net loan book growth for the first half, slightly lower than originally guided as we prioritised returns over growth.

"The group remains a leading buy-to-let lender with a 9% share of new buy-to-let mortgages at the end of May, demonstrating the strength of its more complex professional, multi-property landlord proposition."

Golding said that based on current market activity and the company's "disciplined approach" to lending and retention, the group now expected to deliver underlying net loan book growth of about 3% for 2024.

"Underlying net interest margin is expected to be in a range of 230 to 240 basis points for the full year as increased competition in the subdued mortgage market leads to maturing fixed term mortgages redeeming or switching onto lower prevailing spreads more quickly, and as we continue to monitor customer behaviour in reversion on the Precise book for any potential impact on the measurement of EIR.

"The underlying cost to income ratio is expected to be 36%, commensurate with the net interest margin guidance and as we continue to maintain our cost discipline while we invest in the business.

"We have seen an improvement in the macroeconomic outlook recently which supports our cautious re-entry into more cyclical, higher margin sub-segments, which will contribute to returns in the medium term."

OSB was now past peak interest rates, Andy Golding explained, which would also provide stimulus to the mortgage market.

"The group is well-capitalised and well-positioned to successfully leverage our unique multi-brand structure and benefit from the opportunities as they arise.

"I remain confident in the outlook for the group and our ability to deliver sustainable and attractive returns for our shareholders."

At 0956 BST, shares in OSB Group were down 16.12% at 403.4p.

Reporting by Josh White for Sharecast.com.