With UK house prices softening, current and potential investors in OSB Group PLC (LSE:OSB), the specialist mortgage lender, were offered some comfort by RBC Capital Markets.
"Some investors have recently been asking us what a theoretical large fall in house prices could mean for the profitability of OSB if combined with a deterioration in asset quality," analysts at the London arm of the Canadian bank said in a note, reiterate an 'outperform' rating and price target of 750p.
House prices in the UK have soften 4% from last August's peak, they noted, and are expected to fall further from here.
In its last full-year results, of OSB's £13.25bn total loans and advances to customers, £10.9bn were buy-to-let (BTL) and £2.3bn residential mortgages.
BTL, the analyst said, typically experience lower cost of risk (COR) than residential lending.
"If a tenant is not able to pay their rent, professional landlords will usually have multiple properties (average six) acting as a natural hedge, leading to rental payments-in being circa 2x mortgage payments-out."
Collateral levels are "robust" with average loan-to-value rates at around 64%.
"As a reminder OSB's base case if multiple landlords default is the installation of a receiver to directly collect rental income for the bank. Therefore in practical terms, BTL properties would not need to be sold en masse in a downturn, the bank would just run a rental portfolio."
The analysts mocked up a theoretical scenario of a 10% fall in house prices, with all landlords defaulting at once and OSB being forced to crystallise losses by selling foreclosed properties.
"We take comfort from the fact that in this very unlikely scenario we estimate that OSB would only generate circa £110m of gross losses, which is lower than the bank's £130m existing stock of provisions.
"In fact in this scenario, house prices would have to fall 22%, before the bank made a loss in FY23 (PAG 28%)."
Although rate-sensitive banking shares have been the popular investment over the last 12 months, the analysts said that as the rate rise cycle is now coming to an end, "we think that investors will start to prefer sustainability of earnings, allowing OSB's shares to re-rate".