One Savings Bank (OSB)

[AdamB]

DO many people on here hold OSB? Recent trading statement said that H2 significantly ahead of H1 and the pipeline is at record levels. They made 19.7p EPS in H1 yet market forecasts for the year are 39.1p. Feels to me that 43p should be closer putting it on a PE of 6.6x this year despite the very strong growth. Yield will also be just under 4% based on their stated dividend policy, which should mean that the earnings growth gets directly translated into increased dividends.

Clearly some people are concerned about macro risk however their net interest margins cant really decline further and you can easily sensitise around the risk. For example, if you assume that armageddon arrives on Jan 1 and turnover declines 25% - 30% in 2017 then even without any cost cuts they're still very profitable and the PE only jumps to 11x, so the downside feels pretty limited.

Any views on here?

[G37y]

Hi, I do now remember something about the Kent Reliance Building Society in the past but had forgot all about it. Like many others who got burned in the banking crisis I tend to be rather wary of the sector, having said that they do seem to be making a rather good show of the business, on the down side the private equity JC Flowers owning over half the shares and the back office work being done in India for me are somewhat of a downside. I will put it on my watchlist but would want a yeild of 5% (and continueing good forecasts) to consider buying. Maybe if Trump gets elected I won't have long to wait.
John

[tabhair]

This is certainly an interesting stock on the face of things. 25-30% ROE, extremely well capitalised on a CET1 basis, leverage ratio not particularly stratospheric. As you state, based on forward earnings, this is trading at what looks an incredible 7x growing earnings. This is either one of the best bargains listed on the FTSE 250, or else there is something seriously wrong here. I am inclined to think the latter is the issue here. From the most recent interim reports, this bank is really a bet on property prices in London and the South-East, most notably in the area of buy-to-let's, commercial property and small-scale residential development. As someone who was living in Ireland during the 2008 banking collapse, I've seen first-hand how this business model can end in bankruptcy. There was a bank there called Anglo-Irish bank that had the exact same profile (high ROE, high NIM, focus on commercial/investment property, low overheard, etc.). It actually geysered investors money for a continuous 15 year period before it ended up imploding, leaving investors with nothing. The issue here is that like Anglo-Irish, when you grow your loan book by 30%+ per annum, you leave yourself incredibly exposed to an economic shock. As long as property prices keep increasing, then the party will go on. However, when so much of your loan book is new, any sort of impairment is likely to be amplified, and with a more riskier commercial/BTL loan portfolio, you have a potentially toxic mix. I think if London/South-East property was to fall by any significant amount (20%+), the impairments that this bank would face would make it insolvent.

Good luck regardless!

[jackdaww]

on the plus side the numbers look good , as do the forecasts .

but banks are tricky , and these challengers are less well known .

too much of a gamble for me.

[LongbeardRanger]

Excellent reply from tabhair.

I downloaded and read a couple of the company's accounts. A few alarm bells for me were the lending to property developers, the second charge mortgage lending, and generally the fact that they generate a high NIM. If NIM is high they must be taking quite sizeable risks, no matter what they say, as I can't see that they have access to structurally cheap funding.

It is possible they really are terrific at credit underwriting, but I have my doubts. No one ever claims to be lending imprudently, after all......!

I would question how stable their deposit funding is. Is it really loyal and sticky, or is it just hot money? What is it they are so good at that means their deposit base will be sticky? I can't see anything, so conclude that it is just hot money, I could be wrong though and happy to consider any reasons why that might be so.

Overall it's not for me (though oddly, there is a case for taking a small position - you know it could blow up any time but hope to make your money before it does, through dividends and top slicing...but that's not really my game).

There are a couple of banks I like at the moment - Metro (MTRO) as a growth story, basically a service and convenience model generating huge amounts of cheap deposits to fund low risk lending, and Svenska Handelsbanken as a more established, well run, service driven bank (again with a UK growth story, as it happens).

Rgds
Phil