The government wanted “challenger banks” and judging by the results this morning from OneSavings Bank PLC (LON:OSB) it has one, but who is being challenged?
It looks very much like Lloyds Group PLC (LON:LLOY), the most domestically focused of the established Big Four (Lloyds, HSBC, Barclays, RBS) London-listed lenders, though Spain’s Banco Santander (LON:BNC), which also has a London listing might also be looking over its shoulder.
OneSavings’ underlying profit before tax at £137mln in 2016 was 4% ahead of consensus forecasts and the outlook was very bullish.
“We expect to deliver net loan book growth in the mid-teens in 2017, whilst keeping NIM [net interest margin] and cost to income ratio broadly flat,” the bank’s chief executive Andy Golding said.
There was a better-than-expected 28% increase in new business origination to £2.3bn, which drove a loan book increase of 16% to £5.9bn from £5.1bn the year before.
Lending, as opposed to speculating wildly on the future price movements of the Slambovian gumbo bean via a potpourri of complex, opaque securitised highly leveraged financial instruments, is supposed to be the bread and butter of Lloyds and its other brands, Halifax and Bank of Scotland.
Lloyds provides around one in four mortgages to first time buyers in the UK, which as market shares go is pretty dominant.
Its loyal army of savers provide a useful, cheap source of capital.
It’s a model that OneSavings appears to be emulating, with some success.
It targets the buy-to-let/small-to-medium enterprise (SME) sector and also provides residential mortgages and personal loans.
“We continue to differentiate ourselves from the competition by offering well defined propositions in high margin, underserved markets, where we have the experience, as well as the internal and intermediary infrastructure, to successfully develop and service those markets,” the bank boasted in this morning’s statement.
For a company that grew out of the relatively obscure Kent Reliance Building Society, it is making great strides.
(As an aside, whose stupid idea was it to allow the demutualisation of building societies?)
“I am particularly pleased that Kent Reliance won the Personal Finance Best Buy-to-Let Mortgage Provider award for the second year running and the What Mortgage Best Specialist Lender award in 2016. This combined with our broker net promoter score ('NPS') of 48% demonstrates the strength and value of our lending customer franchise,” Golding said.
If OneSavings Bank is proving itself a favourite with savers and house buyers, the shares are also proving increasingly interesting to income-focused investors – another area where traditionally Lloyds has scored highly.
A full-year dividend of 10.5p means OneSavings shares are yielding about 2.54%; Lloyds, which has had a chequered record on the dividend front since the credit crunch, is currently yielding 3.7%, so it still has the whip hand there, especially when you factor in the special dividends it is in the habit of handing out.
That being said, OneSavings has a policy of paying out at least 25% of underlying profit after taxation, which in 2016 meant a 20.7% increase in the divi.
If it keeps up that rate of increase, its shares might soon supplant Lloyds as the default choice of widows and orphans.