Shares in OSB Group (OSB) fell by almost a fifth in the aftermath of its interim results, which contained another earnings downgrade. The specialist buy-to-let lender thinks its underlying net loan book will grow by just 3 per cent in 2024, compared with previous estimates of 5 per cent. 

Meanwhile, its underlying net interest margin – which compares interest received with interest paid – came in below expectations at 2.43 per cent between January and June. Management has downgraded its expectations for the full year from 2.51 per cent to 2.3-2.4 per cent. 

OSB has been suffering as a result of the “subdued mortgage market” and increased competition among lenders. Management said its buy-to-let customers are refinancing their loans faster than usual to avoid higher rates, and are thus spending less time on the reversion rate that kicks in once a fixed mortgage ends. Last year, OSB had to adjust its effective interest rate by £181mn as a result of these pressures.

Management said it continues to monitor customer behaviour but – for now at least – has not made any changes to the behavioural assumptions used to measure the effective interest rate. “Borrowers’ behaviour can be variable as base rate and market dynamics change,” it concluded. 

There are a number of bright points in the results. OSB’s cost-to-income ratio – which compares administrative expenses with total income – improved to 34 per cent, primarily as a result of higher income (last year’s figure was badly affected by the interest rate adjustment). Similarly, its balance sheet remains strong and it has announced another £50mn buyback.

Interest rate cuts should also provide a much-needed boost to the mortgage market. OSB said this is supporting a “cautious re-entry into more cyclical, higher margin sub-segments” which could increase returns in the medium term. For now, however, we stick with hold.

Last IC View: Hold, 384p, 14 Mar 2024