OSB’s profit drops to £76.7m in H1 due to reporting changes

Andy Golding (pictured), chief executive of the OSB group, said it saw a “strong operational performance” but this was impacted by “the adverse underlying EIR [effective interest rate] adjustment of £180.7m”. 

International Financial Reporting Standards (IFRS) EIR method requires that an EIR is calculated at loan origination and considers all contractual and behavioural cash flows associated with the mortgage including fees, early redemption charges (ERCs) and the average time the customer spends on the reversion rate after the initial fixed rate period. 

OSB reported that some of its customers were spending less time on the reversion rate due to behavioural changes. 

Its organic gross lending rose two per cent annually to £2.3bn while its net loan book increased by four per cent to £24.6bn. Its net interest margin contracted by 109 basis points to 1.71 per cent. 

Golding said: “Excluding the adverse EIR adjustment, the underlying and statutory net loan book would have increased by five per cent in the first six months of 2023.”

Arrears were stable at 1.2 per cent, compared with 1.1 per cent as of 31 December 2022. 

OSB provided secured funding to non-bank lenders and the total credit approved limits came to £202.5m in H1, with total loans outstanding of £85.1m. This was down from £274m and £99.2m respectively, as of 31 December. 

Fourth largest buy-to-let lender

Golding said he was pleased the group was ranked the fourth largest buy-to-let lender, as per UK Finance data, and said its lending franchises continued to grow.

Looking forward, he added: “The group remains well capitalised, with strong liquidity and a high-quality loan book and customer franchises. We have supported our customers and colleagues who are facing the realities of the increasing cost of living and rising interest rates, and we will continue to focus on those who require most assistance.

“We are building a healthy pipeline of new business and have a proven track record of retaining customers, attracting new business and working with high quality borrowers. Based on our current pipeline and application volumes, we reiterate our target underlying net loan book growth of around seven per cent for 2023.

“The group has a proven track record of delivering strong results, with a clear strategy and risk management framework. We have consistently demonstrated our resilience, which allows us to look to the future with cautious optimism.”

OneSavingsBank 

The group’s OneSavingsBank (OSB) business saw a net interest income of £241.1m, split between £196.3m for buy-to-let and SME and £44.8m for residential.  

The division contributed £192m to the group’s profit, compared to £220.8m last year. Among its borrower types, £154.3m came from buy-to-let business and £37.7m was generated from residential activity. 

Its gross loans and advances came to £13.9bn, with £11.6bn issued to buy-to-let borrowers and £2.3bn to residential customers. This compared to gross loans and advances of £13.2bn in the six months to 31 December 2022. 

Buy-to-let and SME business 

OSB’s buy-to-let/SME net loan book increased six per cent to £11.4bn which it said was supported by £1.08bn of organic originations. Originations were 30 per cent up on the previous period.  

Net interest income increased by 12 per cent to £196.3m from £175.7m. 

The buy-to-let/SME segment’s profit contribution of £154.3m was down 13 per cent on last year, largely due to the higher impairment charge in the period. It made an impairment charge of £34.4m, up from £2.6m last year, which it put down to house price moderation, the macroeconomic outlook and changes to the IFRS modelling. 

During the period, the group focused on the risk of its new lending which resulted in a decline in the average loan to value (LTV) from 74 per cent last year to 70 per cent this year. 

Within the buy-to-let and SME book, the average LTV rose from 63 per cent at the end of 2022 to 66 per cent which the group attributed to declining house prices. Some 4.3 per cent of loans were higher than 90 per cent compared to 3.2 per cent at the end of last year. 

OSB’s buy-to-let gross loan book rose by five per cent to £10.2bn compared to the six months to December. It said this was driven by organic originations, which increased by 17 per cent to £786.9m. 

The group said rising mortgage rates led landlords to focus on refinancing in H1 and the proportion of buy-to-let remortgage completions through Kent Reliance was stable at 59 per cent, compared to 60 per cent last year. 

There was also a rise in product transfers, with 75 per cent of borrowers choosing a new product within three months of their rate ending, compared to 62 per cent last year. 

The group said five-year fixed rate products were still popular and accounted for 70 per cent of completions, up from 67 per cent a year ago. Some 91 per cent of completions at Kent Reliance came from professional landlords with multiple properties, up from 83 per cent in 2022. Some 86 per cent of purchase applications were from landlords borrowing through limited companies, up from 76 per cent last year. 

The average LTV of the buy-to-let book stood at 65 per cent, which was higher than the 62 per cent average at the end of last year. Again, this was put down to falling house prices. 

The average loan size was flat at £255,000. 

Despite the higher mortgage rates, the average interest coverage ratio (ICR) was still high at 178 per cent. This was down from 211 per cent last year. 

Interbay 

Within its Interbay brand, which lends to commercial and semi-commercial borrowers, organic originations more than doubled to £193.7m, up from £72m last year. This resulted in a 13 per cent rise in the gross loan to £996.4m. 

The average LTV of the commercial loan book increased from 69 per cent to 73 per cent and the average loan size went up from £375,000 to £390,000 when comparing the six months to 31 December 2022 to the six months to 30 June 2023. 

Heritable 

Within OSB’s Heritable brand which provides finance to SME residential property developers, the gross loan book rose from £184.5m at the end of last year to £237.5m by H1 2023. A further £137.5m was committed, compared to £162.2m at the end of last year. 

The total approved limits came to £518.7m, up from £502.6m at the end of last year. This exceeded the drawn and committed funds, which OSB said was due to the revolving nature of the facility. 

The rates of sales in H1 fell from the levels they were at the end of 2022 which put loan repayments at a lower level. 

As of 30 June 2023, the Heritable brand had committed finance to support 1,971 residential units.  

Residential activity

Within its residential sub-segment which serves owner-occupiers, gross lending was relatively unchanged from £2.32bn at the end of last year to £2.34bn in H1. 

The loan book grew by one per cent to £2.33bn and organic first charge originations completed by Kent Reliance dropped by 27 per cent annually to £179.7m. 

It attributed this to a drop in activity due to “volatility” in market pricing. The Kent Reliance gross book increased from £2.15bn at the end of last year to £2.18bn in H1. 

Gross loans in its run-off second charge book managed by Precise Mortgages came to £152.4m, down from £171.8m in December. 

The net interest income in this cohort increased by four per cent to £44.8m because of growth in the loan book and higher interest rates. Because of the decline in house prices, the average LTV of its loan book came to 47 per cent, up from 45 per cent in December. 

Some 2.1 per cent of loans were at LTVs of 90 per cent or higher, up from 0.8 per cent in December. 

The average LTV of new residential loans was relatively flat compared to last year at 62 per cent. 

Charter Court Financial Services

OSB’s Charter Court Financial Services (CCFS) segment, which provides specialist buy-to-let, specialist residential and bridging loans, contributed a loss of £4.5m in H1, compared to a profit of £141.m last year. 

Gross loans were higher than the six months to December’s £10.49bn at £10.81bn by H1. 

The buy-to-let arm of CCFS, Precise Mortgages, posted a 40 per cent yearly fall in originations to £516.4m. Despite this, the gross loan book grew by two per cent to £7.6bn when compared to the six months to December. 

Refinancing activity rose amid increasing interest rates, and 53 per cent of completions during the period were remortgages. This compared to half last year. 

Five-year fixes were chosen by two thirds of borrowers who completed during the period and borrowing through a limited company accounted for 65 per cent of business. Loans for specialist property types represented 18 per cent of completions. 

The average LTV of the loan book was 67 per cent while the average loan size was £190,000, broadly stable when compared to the half-year to 31 December. 

New loans had an average LTV of 71 per cent and the average ICR was 154 per cent.   

Underlying net interest income in this sub-segment reduced to £3.1m compared with £102.4m in the prior period. 

OSB said the benefit of the loan book growth and base rate rises were offset by the EIR adjustment and borrowers spending less time on the reversion rate before refinancing. It said this dropped from an average of 17 months on the reversion rate to five months. 

On a statutory basis, the buy-to-let sub-segment made a negative contribution to profit of £30.8m compared to a profit of £81.8m last year. 

The gross loan book within the CCFS residential sub-segment rose by three per cent to £2.75bn, supported by a 23 per cent rise in organic originations to £317.2m. 

The average loan size in this sub-segment came to £152,000 while the average book LTV was stable at 58 per cent when compared to the six months to December. The average LTV for new lending fell from 67 per cent to 62 per cent, which the groups said was due to its risk assessment.  

Annually, net interest income decreased from £45.6m to £20.3m. 

The residential sub-segment contributed £7.5m to the profit, compared to £41.3m last year. 

There was also an impairment charge of £1.8m, compared to £2.5m credit last year, due to the economy and house price changes. 

Bridging originations rose from £77m last year to £226.7m this year, and the gross loan rose 78 per cent from December to £266.8m by June. 

This segment contributed £2.6m to profit, up from £1.8m last year.  

The second charge sub-segment saw its gross loan book reduced from £111.9m at 31 December to £97.3m by 30 June. The group no longer offers second charge mortgages and the book is run-off. 

It made a £2.4m contribution to the group’s profit, down from £2.7m last year.