It is frustrating when you are no longer the next big thing. Upstart mortgage lender OneSavings Bank on Wednesday reported rapid expansion in its loan book. Growth this year would be in the high teens, it said. A return on equity of 23 per cent in the first half should make incumbent banks weep, even if down from 26 per cent a year earlier. OneSavings’ shares still dropped 5 per cent, extending their fall over the past year to 24 per cent.
Some scepticism was warranted. Nimbler, more profitable challenger banks were once the future. They will not escape an intensifying UK mortgage price war, nor the potentially disastrous impact of a chaotic Brexit on housing and funding markets. Nevertheless, OneSavings, which serves professional buy-to-let buyers, may be better placed than its rivals.
True, net interest margins fell more than expected in the first half. Older books of business were refinanced at lower rates. This effect had “largely run its course”, the bank argued. It nevertheless showed mounting competitive pressures.
Unlike other challenger banks, it is tightly focused on one sector of a volatile housing market. But OneSavings shows signs of maturing well. It plans to acquire Charter Court in an all-share deal valuing its similarly specialist rival’s equity at £670m. That will scale its business. Professional clients should also be better than the public at playing a housing market downturn.
Listed five years ago, OneSavings shares initially outperformed the UK bank sector. Over the past two years they have merely traded more or less in line with larger peers. At just 1.3 times tangible book value, the share price is cheap relative to its high profitability. Returns on equity should remain about 20 per cent for at least the next two years, reckons Panmure Gordon.
Brexit clouds such forecasts in uncertainty, of course. But if the outcome this autumn is less worse than the market fears, OneSavings should be quicker than most in staging a comeback.
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