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OneSavings Bank looks interesting as share overhang is nearly removed
Challenger bank OneSavings Bank (OSB) may have seen its share price lose momentum since last summer but we believe this company is ultimately going to reward shareholders.
Its share price has been held back over the last nine months by 38% of its issued share capital being sold in four chunks. Private equity owner JC Flowers has been selling down its position and now only holds 9.7% of the business.
JC Flowers is free to sell another chunk of shares any time after 15 March, which is also the day when OneSavings’ full year results are published.
WHAT HAPPENS NEXT?
We believe the private equity group will seek to exit its remaining stake fairly swiftly this year, thereby removing a major share overhang. That should also allow the market to shift its focus back on OneSavings’ core business.
Investec analyst Ian Gordon says once this ‘transitory blockage’ is removed, he expects to see a resumption of strong share price performance to more closely track ‘the outstanding operational story’.
This ‘outstanding’ story is due in part to the bank’s savvy use of the Bank of England’s Term Funding Scheme (TFS).
Although the scheme is now closed, it allowed banks to borrow money close to the Bank of England’s lower interest rate. This helped OneSavings by allowing it to fund higher proportions of its loan book with cheap TFS at the same time gaining a much wider spread between TFS costs and average retail funding costs.
OneSavings Bank has been making good use of TFS, drawing a further £449m in the final quarter of 2017 while paying back the final tranche of its Funding for Lending Scheme (FLS) borrowings, which were more expensive.
FLS was a precursor to TFS and was intended to encourage banks to loan to small businesses.
WHAT DOES ONESAVINGS DO?
The Kent-based lender focuses on the professional landlord market which is growing in providence since tax and regulatory changes negatively impacted private investors in the buy-to-let market.
Private investors historically had a large chunk of the market and their loss is most definitely OneSavings’ gain.
The bank’s success may have been signposted for some time. In November last year it updated its loan book forecast for its
year-end from ‘at least high teens’ to a resolute 20%.
Investec’s Gordon adds 50 basis points to that prediction, estimating growth of 20.5% in 2017.
The company’s year-on-year loan origination was up 33% in the third quarter of 2017, a sign that its key market of professional landlords is thriving. (DS)