Osb Share Discussion Threads

[apple53] 02/3/2024 20:07

I posted something on the STB chat in response to some intriguing points.
You might thing it arrogant but someone might find it useful if I repost here. AND I would find it useful if anyone wanted to argue or add. Some of my knowledge is out-of-date, and some of my numbers merely educated guesses.

Here goes:
QUOTE
I agree this is a great opportunity for investors. I don't agree with your view on rates or growth etc., and I wrote the following to remind myself of history and the investment case for these banks.

Higher rates tend to benefit earnings, though much higher rates are typically thought likely to increase bad debt charges. Materially higher rates and a high recession risk is normally enough to hit multiples. [it is important you don't have silly regulators that require you to buy reams of government bonds at low interest rates - this is what killed SVB and, arguably, First Republic].
Overall, though, there isn't really any correlation between rates and multiples.
'Any growth' doesn't tend to drive the share price violently up. Balance sheet growth requires capital, and more than it used to under Basel 1/2. In the case of STB the drive for rapid growth probably hit the share price, as it required a dividend cut, and also because some shareholders are rightly scared of rapid growth in bank balance sheets. One of the clearest correlations (with causation) in banking is rapid growth and subsequent high (sometimes disastrous) bad debts.
Bank investors 'normally' like modest balance sheet growth, faster growth in fee income, a low level of dealing income and an expectation of a falling cost income ratio.

Historically, banks have traded at 8-15x forward eps. It is only in the past few years that 5x earnings has been considered normal, and this in Europe, but not the US, where 9-12x is more typical.

What is doubly weird about the ridiculously low multiples is that UK banks are much much safer than they used to be. Equity capital ratios are 2.5-4x higher than in the noughties. [There is a downside to this - RoEs are lower, and incremental growth needs more incremental capital]. They are also encouraged to ex-ante provision (which is good as it helps to smooth provisioning across the cycle). Overall CoE should be lower.

None of this means that banks are immune to property market collapses. Some (US) banks are over-exposed to commercial property (NYCB). This has been the cause of most bad debt crises (as opposed to the liquidity crisis post-Lehman). Resi mortgages are also at risk from a big increase in unemployment, double digit interest rates, 40% falls in value (each in isolation) or a milder combination of the 3.
The other risk to banks is social media, which magnifies problems that used to swept under the carpet, such that issues which might have been manageable with a couple of year's retained earnings can now be enough to cause a run.

STB is probably the weirdest example (and could be the cheapest bank in the developed world), but OSB stands out even more. STB is tiny; OSB merely small. STB is building a growth track record; OSB already has one. STB is modestly profitable; OSB is very profitable (for a modern bank). STB is modestly at risk from an increase in bad debts; OSB is highly cushioned - it has SUCH a low cost income ratio that its leverage to an increase in bad debts is almost the lowest in the industry. If it was 10x the size and based in the US it would trade at twice the valuation or more.

I have no idea when this situation will 'normalise', but in the mean time these banks need to buy back their stock (and I would happily forgo some yield to fund this).
UNQUOTE

[lord gnome] 01/3/2024 10:06

Going up on no great volume but you never know what's going on behind the scenes. Whatever, enjoy it while it lasts.

[thebutler] 01/3/2024 09:39

Hey up, what's going on here then?

[lord gnome] 08/2/2024 15:49

And back to square one. Ho hum.

[thebutler] 08/2/2024 13:34

Nobody can read the Market (even though some pretend they can) otherwise we would all be millionaires.

Good strength here. Glad I took advantage of sub 300p which significantly brought down my average. Personal price target of 550p before cashing in.

[lord gnome] 08/2/2024 13:29

OSB in demand again today. This does tend to bounce around. A good trading share if you can read the market. I can't.

[lord gnome] 24/1/2024 10:00

Beginning to look as though recent weakness was just a technical matter. A retest of the 400 breakout level. We appear to be moving north at pace. Hope it lasts.

[pj84] 05/1/2024 09:51

Shore Capital: OSB shares below average

There is ‘plenty more to go for’ when it comes to OSB (OSB) shares as the challenger bank’s valuation remains below the historic average, says Shore Capital.

Analyst Gary Greenwood retained his ‘buy’ recommendation and a ‘fair value’ target price of 835p on the Citywire Elite Companies plus-rated stock, which rose 1.2% to 442p yesterday.

‘OSB shares have performed better of late, recovering much of the lost ground following the surprise profit warning in July last year,’ he said.

‘Nevertheless, valuation multiples remain well below historical averages and, with interest rates predicted to fall in the year ahead, we think the shares can maintain their positive momentum.’

Greenwood said the shares trade on a 2024 profit/net asset value of 0.8 times and a price to earnings of 4.1 times. The dividend yield is currently 9.8%.

‘There is currently 91% upside to our fair value of 835p which implies that there is still plenty more to go for,’ he said.

[flyfisher] 15/12/2023 08:29

It's winter, i can't play golf!

Capital needed for basel compliance will be covered by retained earnings, assuming business as usual, by 2025 if they so wish.

So basel 3.1 seems a non issue here.

[eigthwonder] 15/12/2023 08:14

Thanks. A Basel report - having trouble sleeping…?

[flyfisher] 14/12/2023 15:57

Basel 3.1 comes in from 2025 to 2030. Last year the BOE estimated that banks would need an additional 6% of cet1 capital to comply.

OSB had estimated earlier this year that it will require 2% additional cet1 to comply, however requirements have been watered down a bit since then with the BOE now expecting that the sector would need 3% addition to cet1, so OSB is ahead of most others.

I think the freeing up capital issue relates to adopting IRB method of risk assessment rather than the standard approach. Now that basel 3.1 is in its finished form then i guess that OSB will be able to apply for accreditation in 2024.

On balance, any capital freed up by this will be offset by capital needed to comply with basel 3.1.

I happened to read a basel report a few days ago.

[eigthwonder] 14/12/2023 09:21

Does anyone know if this year’s little hiccup has interrupted or stymied their efforts to calculate their own capital requirements - I think it was due to land in 2025 and free up £100m?

[flyfisher] 14/12/2023 09:14

Paragon tip in the press yesterday and interest rate outlook helping.

[lord gnome] 06/12/2023 10:45

Lining up for a look at 400 and what should be a major breakout up to 500. All my financial heavyweights looking good today on prospects for interest rates and a fall in inflation figures over the next 12 months.2024 could be a good year.

[rcturner2] 06/12/2023 09:03

I think generally people have realised that the world is not about to end and a lot of the panic selling has ended.

[eigthwonder] 06/12/2023 08:56

Paragon numbers good

[jonnybig] 06/12/2023 08:55

Financials in general rising because of fall in US ten year gilt rate.

[flyfisher] 06/12/2023 08:49

Any reason for todays rise?

[brucie5] 01/12/2023 15:43

Apple, thanks, interesting. I hold both and will probably continue to add.

[lord gnome] 01/12/2023 14:27

Our sellers are still around. I thought we were off to the races earlier, but as soon as it pops up its head, the sellers appear and whack it back down again. Sigh.....

[apple53] 24/11/2023 16:50

I have always seen OSB as a growth stock. My small concern (priced in tenfold) is that rapid growth in loans is beautifully correlated with bad debts 2-6 years later. However, a) this is less likely to be true when you are taking market share in a market which is growing only modestly, and b) the REAL growth in the portfolio will actually be pretty modest.

The great resilience, as I keep banging on about, is the stunningly low cost income ratio, so that even if bad debts spike (or more likely OSB's internal models demand a big boost to the stock of provisions even without an actual large increase in credit losses), the impact on profits is much lower than its peers.
It also means profit growth driven by falling provisions is lower than peers (check out marketscreener for what happened to STB's eps forecasts, ie spiking and collapsing as dopey analysts failed to normalise provisions).

STB is cheaper on a PE and my holding is larger, but I still see OSB as the quality stock.

[thebutler] 15/11/2023 08:43

Looking very strong here. Looking at a medium term rise to 450p before xmas.

[pj84] 14/11/2023 19:24

We sold this bank, then the shares lost 25pc – now we’ll buy again

Questor share tip: buy-to-let specialist does not deserve to be lumped in with lowly valued high street giants

By
Algy Hall
13 November 2023 • 6:00am

In March, Questor advised readers to sell OSB and was right to do so – shares in the specialist buy-to-let mortgage lender have lost a quarter of their value since.

This column is relieved to have sold before a profits warning in July that sent OSB shares tumbling. The lender disclosed a £180m hit because mortgage borrowers were refinancing more quickly. Broader investor unease about the banking sector, which prompted our advice to sell, has meanwhile persisted.

Now, however, we’re recommending the shares again, guided by the investment decisions of some of the world’s best-performing fund managers.

Ten of these professional investors – each among the top-performing 3pc of the 10,000 equity fund managers tracked by the financial publisher Citywire – own shares in OSB. As a result the stock is rated AA – just below a top AAA rating – by Citywire Elite Companies, which rates companies on the basis of their backing by the best-performing fund managers.

What’s more, many of those investors have been adding to their stakes over the past few months. They include Matthew Tillett, who bought more shares for his Premier Miton UK Value Opportunities fund in July. Tillett took over the fund in November last year after delivering four times the market return over three years on the fund he ran before.

He told his investors that shares in specialist lenders such as OSB were trading on valuations as low as those of Britain’s biggest banks, yet they were “less dependent on the interest rate environment to sustain high levels of profitability”.

Trading at just 0.6 times forecast book value, shares in OSB are close to the cheapest they have ever been on that measure and 30pc cheaper than when we advised readers to sell in March. A forecast dividend yield over the next 12 months that stood at 7.1pc when we sold has meanwhile climbed to 9.9pc – a level that suggests the market expects a cut.

But a trading update earlier this month indicates that the bank may be putting its problems behind it. There was no worsening of the situation that caused that big hit to profits from earlier in the year, when OSB was burned by borrowers spending less time between fixed-rate mortgages on stop-gap “reversion” rates that are lucrative for the bank.

Reassuringly, it left unchanged guidance for this year’s underlying “net interest margin” – the difference between the interest rates a bank earns on the loans that it makes and the rates it pays to depositors – at 2.6 percentage points. That would mark a recovery from the first half of the year, when the hit to profits resulted in a slump from 3 percentage points to 2.


That’s not to downplay the difficult trading conditions for banks and the particular challenges posed by the buy-to-let market, in which OSB specialises.

With interest rates starting to plateau, heightened competition between banks is curtailing rates on loans while the rates banks need to offer to attract depositors are rising. Increasing bad debts after the surge in mortgage costs, coupled with the impact of tightening regulation on the buy-to-let market, are adding to investors’ fears.

But OSB appears to be coping well with the pressures. Alongside the maintained net interest margin guidance, the bank reported a 5pc increase in deposits in the three months to the end of September. But the biggest positive from the third quarter was lending growth.

OSB reported that in the first nine months of the year it had achieved 7pc loan growth. This was previously the target for the whole of 2023 and guidance for the year has now been raised to 9pc.

Its ability to win market share thanks to its specialist focus is a key long-term attraction. It is also a reason to think it could weather tougher markets better than most as the specialist focus is reflected in the bank’s strong reputation for risk management.

On this front, there’s reassurance from low levels of problem loans and average rent-to-interest cover of 178pc on OSB loans and 154pc for its Charter Court Financial brand, which accounts for about 45pc of gross lending. Meanwhile, a scarcity of rental properties makes landlords well placed to pass rising interest costs on to tenants.

OSB’s resilience should also be helped by its bias to professional landlords who use corporate structures to secure tax and property management advantages.

This buy-to-let specialism keeps costs down compared with mainstream banks. OSB expects its costs to amount to around a third of its income this year, compared with more than half for many larger rivals.

The branchless bank’s low-cost model underpins its attractive levels of return on tangible equity. Even after the profit hit in the first half of this year, analysts expect the metric to reach 15.2pc in 2023 before rebounding to the high teens from next year.

It is not hard to see why, following the slump in the shares this year, top fund managers are betting that OSB’s valuation offers protection from further share price falls and the potential for significant gains should the third-quarter results prove to be a taste of things to come.

Questor says: buy
Ticker: OSB
Share price at close: 347.2p

[apple53] 03/11/2023 21:37

I will regret selling any at all. I am a dupe for relative value. But I continue to believe OSB is worth £8-10.
In the early years, however, I didn't trade it, and missed a number of spikes and 20-30% reversals. On balance I have done well trading it since, selling quite a lot shortly before the recent collapse. I would probably trade it more if it weren't for Stamp.