OneSavings Bank PLC (LON:OSB) shares edged higher after Numis upgraded the stock, saying it offers “good value”.
Numis raised its rating on the bank to ‘add’ from ‘hold’ and left its target price at 470p.
“The group is now being valued at 7.9x historic earnings and, while we believe OSB, along with all other lenders, is over-earning and it will see impairment increase, the valuation now offers good value,” the broker said.
“We believe the assumptions and forecasts we have are conservative.”
READ: OneSavings Bank shares gain as it estimates strong growth in loan book for the year
Shares have had a flat performance in the year to date despite reporting a 21% increase in underlying profit before tax last year to £167mln.
OneSavings Bank versus Nationwide and Lloyds
But Numis pointed out that the lender’s yield on loans is double that of Nationwide, and its cost to income ratio is nearly half that of Lloyds Banking Group PLC (LON:LLOY), which claims to be the best in class. OSB’s impairment change is also less than half that of Lloyds, Numis said.
“Loan book growth was ten times that of Nationwide and nearly 18x that of Lloyds,” Numis said.
“OSB’s ROAE (return on average equity) is nearly 5x that of Nationwide and well over three times that of Lloyds.”
Numis said it believes its terminal ROAE of 17.5% by 2020, which is 42.3% below that recorded last year, is conservative.
“This ROAE is consistent with commodity capital entering the specialist space that OSB operates in and with Lloyds achieving a 12.0% ROAE (our cost of equity estimate for OSB is 12.0%) from the same loan book.”
Shares rose 1.1% to 414p in morning trading.