OSB Group H2 2024 Earnings Report

OSB Group EPS Results

• Actual EPS: GBX 82.20
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

OSB Group Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

OSB Group Announcement Details

• Quarter: H2 2024
• Date: 3/14/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, March 13, 2025
• Conference Call Time: 4:00AM ET

OSB Group (LON:OSB), through its subsidiaries, operates as a specialist mortgage lending and retail savings company in the United Kingdom and the Channel Islands. It provides private rented sector related buy-to-let, commercial and semi-commercial mortgages, residential development finance, secured funding, bridging, and asset finance services. The company also provides buy-to-let and specialist residential mortgages, mortgage servicing, administration and analytical, mortgage originator and servicer, and retail savings products; and back office processing services. OSB Group Plc was founded in 1847 and is based in Chatham, the United Kingdom.

OSB Group H2 2024 Earnings Call Transcript

Key Takeaways

• Disciplined new lending maintained ROE and grew net loan book by 2.5% while sustaining a net interest margin of 230 bps despite transitional EIR adjustments.
• Cost-to-income ratio stayed at 37% with core cost growth of just 3%, funding transformation initiatives like the new savings platform and a mobile broker app now used by over 10% of intermediaries.
• Delivered £443 m pretax profit (16% ROE) and returned £226 m to shareholders through a £250 m buyback, a 5% dividend increase to 33.6 p, and a further £100 m buyback plan.
• CET1 ratio remained strong at 16.3%, with full repayment of TFSME drawings underway, MREL requirements met ahead of schedule, and a glidepath to a 14% target post-Basel III.
• Underlying net interest income fell 3% due to lower prevailing spreads and EIR impacts, and the group incurred a £2.4 m loss on sale from the December securitisation.

Presentation

[Andy Golding, CEO at OSB Group]

Good morning, everyone, and thank you for joining OSB Group's 2024 preliminary results presentation. I'm pleased to present this morning's results to you and excited to regroup at 10:00 A.M. for our investor update, where we'll share our medium-term aspirations. In this results presentation, I'll take you through the key highlights for the year, and then I'll hand over to Victoria for the financials in more detail, and then return to take you through the outlook. Firstly, I'll turn to our performance in 2024. This slide highlights three key themes that help summarize our strategy and the results for the year. Firstly, we've been very disciplined in our approach to new lending. We focused on maintaining our ROE on new lending during a period of high competition against a backdrop of a broadly subdued market in volume terms.

[Andy Golding, CEO at OSB Group]

During the year, some lenders have elected to drop pricing to a level below those that would deliver our target returns. As a result, excluding the impact of the derecognition trade in December, the net loan book grew by 2.5%, broadly in line with our most recent guidance, and this is reflective of our pricing discipline. Our net interest margin of 230 basis points is inclusive of a further EIR adjustment of GBP 15.9 million, reflects the transitionary impact of lower-performing spreads on mortgages as products written in prior years reach maturity and fixed-term savings recycled onto tighter spreads. In addition, we've taken actions which have helped to reduce future EIR sensitivity to BAU levels. An improvement in the macroeconomic outlook, specifically on HPI, resulted in an overall release of loan loss provision whilst maintaining a strong level of coverage.

[Andy Golding, CEO at OSB Group]

Secondly, we've maintained our cost discipline and efficiency while also investing in our future. Our cost-to-income ratio is broadly in line with our expectations at 37%, and whilst our focus on cost management limited core cost growth to only 3%. Our transformation program has continued to deliver, with foundational capabilities built that have enabled the rollout of our first product on the new savings platform for Kent Reliance customers. The new mobile app for intermediaries has proved very popular, with over 10% of our brokers now engaging with the app. You'll hear more about our transformation plans later today. Finally, delivering attractive ROE and cash returns to shareholders continues to be our primary objective. The underlying GBP 443 million pre-tax profit for the year translates into a 16% ROE, which, together with a strong CET1 ratio, underpins our ability to return capital to shareholders.

[Andy Golding, CEO at OSB Group]

In 2024, we completed two GBP 50 million buybacks and are confirming today a 5% increase in our full-year 2024 dividend to 33.6 pence per share, consistent with our progressive dividend policy. This equates to a total return to shareholders of GBP 226 million in the year, including the buybacks undertaken. I'm also delighted to announce a further share buyback of GBP 100 million over the next 12 months, which will commence tomorrow and further demonstrates the board's continued commitment to return excess capital to shareholders and efficient capital management. I'll now hand over to Victoria to walk you through the financials in more detail.

[Victoria Hyde, CFO at OSB Group]

Thank you, Andy. Turning first to the P&L. Underlying net interest income reduced by 3%, reflecting factors we've talked about before, including lower prevailing spreads on mortgages and deposits as products written in prior years reach maturity and the cost of meeting our MREL requirements. I'll cover these later on the NIM slide. These dynamics were partially offset by the non-recurrence of the adverse effective interest rate adjustment recognized in 2023. Fair value losses on the pipeline mortgage swaps reduced in 2024 compared with prior year, mainly due to movements in the SONIA forward curve, which will reverse over the life of the swaps. We also incurred a GBP 2.4 million loss on sale from the GBP 1.25 billion December securitization and deconsolidation transaction. I'll cover administrative expenses and impairment later in this presentation.

[Victoria Hyde, CFO at OSB Group]

This resulted in a bottom line underlying profit before tax of GBP 443 million, an increase of 4% on the prior year. Underlying earnings per share of 82.2 pence increased due to the higher profit for the year and the lower share count following the GBP 250 million buybacks announced in 2024. The next slide summarizes our strong secured balance sheet. Net loan book reduced by 2% in the year to GBP 25.1 billion, reflecting the derecognition of GBP 1.25 billion of Precise buy-to-let mortgages following securitization in December. Adjusting for this transaction, the loan book would have increased by 2.5%, supported by GBP 4 billion of originations, which decreased by GBP 700 million from the prior period, reflecting our disciplined approach to new lending. Retail deposits grew by 8% to almost GBP 24 billion as of the 31st of December, as the group continued to attract new savers.

[Victoria Hyde, CFO at OSB Group]

This, in turn, allowed us to continue the repayment of our drawings under the Bank of England's TFSME scheme, which stood at GBP 1.4 billion at year-end. We have since continued to make further repayments, and as of today, we have just under GBP 800 million remaining, and we are comfortable with our plan to repay fully by October 2025. You can see that MREL debt increased by circa GBP 400 million due to the further issuance of senior notes in January, which allowed us to meet our interim MREL requirement of 22.5% of risk-weighted assets, plus regulatory buffers ahead of the deadline. The credit quality of our loan book remained strong. Whilst the three-month plus arrears percentage increased, reflecting the impact of a higher cost of borrowing on a small spread of borrowers, arrears plateaued in the fourth quarter at 1.7%, as affordability for remortgaging customers improved.

[Victoria Hyde, CFO at OSB Group]

Interest coverage ratios for buy-to-let originations in the year strengthened, reflecting a moderation in mortgage pricing and growth in rental income. Our loan book is secured at sensible loan-to-values. The weighted average book LTV for the group was stable at 64%. The new lending LTV was also unchanged at 68%, demonstrating the strength of our underwriting and quality of our security. Before turning to the detail, I want to highlight a change to the presentation of our results from 2025. Since the combination with CCFS in 2019, we have presented our results on both a statutory and underlying basis, with the latter excluding acquisition adjustments. As we reached the end of 2024, these acquisition adjustments were fully amortized, and therefore our results going forwards will be presented on a statutory basis only. Consequently, our 2025 guidance is also on a statutory basis, which is comparable to the 2024 underlying.

[Victoria Hyde, CFO at OSB Group]

This slide presents the net interest margin dynamics from the December 2023 exit rate of 273 basis points, where we left you at our last preliminary results. Moving from left to right, lending margins in 2024 were a continued headwind to NIM, as maturing fixed-term mortgages redeemed or switched faster onto lower prevailing spreads. The lending margin was impacted by a GBP 15.9 million EIR adjustment in December, reflecting a one-month reduction from five months to four months in the average time that Precise borrowers are assumed to spend on the higher reversion rate before refinancing. Our fixed-rate deposit book continued recycling onto tighter spreads than those that prevailed throughout much of 2023 and that were written as a volatile period at the end of 2022. In January, we issued GBP 400 million of MREL qualifying debt securities, which diluted NIM by eight basis points versus the December exit rate.

[Victoria Hyde, CFO at OSB Group]

We are now carrying a total of GBP 950 million of MREL debt on the balance sheet, and the adverse impact on NIM from this issued balance will progressively flatten off as it annualizes. Turning to guidance, NIM in 2025 is expected to be circa 225 basis points, as both the lending spreads and net funding impacts on our overall NIM began to stabilize in the second half of 2024. As I look at customer behavior today, we have seen no material change from year-end assumptions in the length of time Precise borrowers remain on the revert rate, and our guidance for 2025 assumes no further change. Following the Precise behavioral change that I referenced earlier and the beneficial impact of the deconsolidation transaction, the EIR sensitivity on the Precise book reduced to circa GBP 27 million at the year-end for a two-month reduction in the weighted average life on reversion.

[Victoria Hyde, CFO at OSB Group]

This sensitivity is expected to decrease by a further circa GBP 10 million by the end of 2025. I am pleased that the potential impact of EIR and NIM and earnings is now significantly less material than it has been over the last few years and back to within the BAU levels seen before 2023. We maintained our strong focus on cost discipline and efficiency as we managed the cost base in an inflationary environment whilst investing in transformation. The admin expenses of GBP 257 million and a cost-to-income ratio of 37% on an underlying basis came broadly in line with our expectations. The group's core U.K. and India costs increased by 3% year on year. Towards the end of last year, we took the difficult decision to undertake a redundancy program, which affected 139 positions across the group and led to a charge of GBP 4.5 million.

[Victoria Hyde, CFO at OSB Group]

As of the 31st of December, the group's number of employees was broadly flat to the prior year. The new Bank of England levy added GBP 3.3 million to our cost base, a step up in 2024 that will roll into core costs in 2025. Our transformation program completed its second full year, with the amount expensed increasing by GBP 9.9 million as the intensity of delivery ramped up. You can see further detail on the right-hand side, and later on this morning, we'll talk further about the benefits the transformation program will bring to our business. The underlying management expense ratio of 85 basis points was four basis points higher than in the prior year, but is still very competitive versus peers. Looking forward, we anticipate circa GBP 270 million of admin expenses in 2025.

[Victoria Hyde, CFO at OSB Group]

Within this, core costs, which were GBP 238 million in 2024, are expected to increase at below the rate of inflation, whilst investment in transformation will continue to increase in line with our projected rollout profile. The next slide provides a waterfall of the movement in the statutory impairment provision for the year. As you can see from the chart, the themes are consistent with those I presented at the August interim announcement. Further improvement in forward-looking macroeconomic scenarios in H2, particularly in respect of house prices, led to a GBP 36.2 million provision release in the year, with a further GBP 7.9 million release was a reduction in post-model adjustments.

[Victoria Hyde, CFO at OSB Group]

Changes in arrears led to a charge of GBP 10.8 million, although I note the rate of growth slowed significantly in the second half, and a further charge of GBP 8.4 million related to changes in the credit profile of borrowers as they transitioned through modeled IFRS 9 impairment stages. Our total coverage ratio has decreased by six basis points but remains more than twice the level it was pre-pandemic at the end of 2019. To give another sense of perspective, our ECL balance sheet provision is more than ten times the size of our average write-offs over the last five years. We will continue to proactively review our forward-looking macroeconomic scenarios and coverage ratio as the outlook evolves. Turning to the capital position, you can see that the group's CET1 ratio remained strong at 16.3% at the end of December.

[Victoria Hyde, CFO at OSB Group]

The waterfall illustrates our strong capital generation from profitability of 2.7%, the 0.5% released by the derecognition transaction completed in December, and the 2% return to shareholders in the form of dividends and share buybacks. In September, the PRA released their near-final rules regarding the implementation of Basel 3.1, which we now expect to reduce our CET1 ratio by just over 1% if it had been fully implemented on the 31st of December 2024, a smaller impact compared to our previous guidance of just under 2%. This improvement is largely due to a favorable clarification of the property revaluation rules for determining LTV banding. Today, the board has announced new GBP 100 million share buyback to commence tomorrow, expected to complete over the next 12 months. The quantum of impact on CET1 ratio will be similar to the buybacks in the prior year at circa 0.9%.

[Victoria Hyde, CFO at OSB Group]

Looking forward, we continue to target a CET1 ratio of 14%. We are on a glide path to this level and expect to operate above this target ahead of the implementation of the Basel 3.1 rules. Thank you. I will now pass back to Andy.

[Andy Golding, CEO at OSB Group]

Thank you, Victoria. Here we set out our 2025 guidance together with a directional view of 2026, and later this morning, we will share our medium-term aspirations. As you'll hear later, 2025 and 2026 are transition years for OSB as we complete our transformation program, some of the dynamics which have impacted our NIM stabilize, and we maintain our momentum for growth across each of the asset classes. For now, I'm going to focus on our guidance for 2025, and when we regather later, we will give you more color on the medium term.

[Andy Golding, CEO at OSB Group]

During 2025, we will continue to work towards optimizing the lending book and delivering a diversified portfolio, growing into high-yielding segments. Jon Hall, our Managing Director in Mortgages and Savings, will talk about this later on this morning. However, given our focus on returns and the profile of lending reaching reversion this year, we anticipate low single-digit loan book growth with similar dynamics to those seen in 2024. NIM in 2025 is expected to be circa 225 basis points, and we anticipate GBP 270 million worth of administrative expenses over the year as we continue to invest in the business. We will tell you more about our transformation program later on. We anticipate that this guidance will deliver a low-teens ROTE in 2025, and later we will set out our plans to improve this as we look ahead.

[Andy Golding, CEO at OSB Group]

In the meantime, we'll continue to prioritize returns to shareholders with the increase in the dividend per share by circa 5%. In addition to moving to a statutory view of our financials, we are aligning with industry practice to report return on tangible equity rather than return on equity. Both ROE and ROTE result in a reported 16% level in 2024, and in the presentation earlier, we've been clear on the intangible that relates to transformation. In 2026, we expect broadly similar dynamics. This year's performance provides a strong foundation for our future aspirations, and I look forward to presenting that to you later this morning. The details of the investor update are on the slide and available on our website, and I do hope you're able to join us at 10:00 A.M.

[Andy Golding, CEO at OSB Group]

With that, we'll now turn over to Q&A, but I would be grateful if you could limit your questions to 2024 and the near-term guidance. Operator, could we open up for questions, please?

[Operator]

Thank you. As a reminder, please press star one if you would like to ask a question. If you'd like to withdraw your question, press star two. First question on the line is from Benjamin Toms at RBC. Please go ahead.

[Benjamin Toms, Director of Equities at RBC]

Thank you for taking my questions. Incredibly difficult. I'm going to keep them to just the next two years, but I'll try my best. Your NIM guidance for the next couple of years is 2.25%. My feeling is that as you go through the next couple of years, headwinds will fall away. You should have a significant tailwind from loan book mix shift. Is that the right way to think about it?

[Benjamin Toms, Director of Equities at RBC]

Would you expect NIM to build as we come out of 2026? Secondly, on the investment spend, it grew significantly in 2024. Should we expect it to grow a little bit in 2025 before plateauing in 2026 and then falling from there? Can you talk a little bit about what that investment spend is being spent on in the next couple of years? Is it investment in tech capabilities, facilitating volumes, or is it investment in efficiency allowing you to generate cost saves? Thank you.

[Andy Golding, CEO at OSB Group]

Thanks, Ben. I mean, I'll touch on the NIM point because actually I share your thought process, and I don't disagree with you at all.

[Andy Golding, CEO at OSB Group]

I mean, clearly we have to give guidance based on what we see today in terms of kind of cost of funds and the dynamics that are coming through the loan book, and of course what we know about what's rolling through the back book versus the strong yields that we're putting on at the front end. Yeah, I mean, we all know that as interest rates come off, OSB historically has seen improvement in its NIM as interest rates reduce. As you say, there are probably potentially a few tailwinds, but we have to guide on what we see today because there's a lot going on in the geopolitical environment and the macro economy that we're not in control of. Hopefully that touches on the NIM point. Vic, do you want to talk about the cost?

[Victoria Hyde, CFO at OSB Group]

Yes, I was going to say, Ben, you will see a lot more on this at 10:00 A.M., but I would say yes, our investment spend, I guess we will give you all the details about our transformation program, but yeah, I would agree with your general sentiment that yes, we have an increase in that cost through our transition period, and then that will taper off and it will drive further efficiency in terms of where that spend is. Yes, it is tech capability. I would say we are looking to change the way our cost is structured and be more tech-enabled to create operational leverage for the future. I would say there is an awful lot that you will find out on that at 10:00 A.M., so we will give you a lot more detail and answer all of those questions and more hopefully in the next session.

[Andy Golding, CEO at OSB Group]

Thank you. Thanks, Ben.

[Victoria Hyde, CFO at OSB Group]

Thank you.

[Andy Golding, CEO at OSB Group]

You have the next one, please.

[Operator]

Sure, thank you. The next question is from Grace Dargan at Barclays. Please go ahead.

[Grace Dargan, VP at Barclays]

Good morning. Thanks both for doing this call now. If I could just come back on NIM and then ask around capital return. On the 26 NIM guide, I guess you're talking about similar levels to 2025. How could we interpret similar levels? Are you talking a couple of basis points here and there, or are we talking more of a range of 220-230, how you're thinking about that? Secondly, on the commitment to return excess capital, I mean, that's great. How should we be thinking about the pace of that? I guess noting your comment, should we be thinking about just a pay down to 15% at least until January 2027? Thank you.

[Victoria Hyde, CFO at OSB Group]

Okay, so yeah, obviously, Grace, 2026 is a fair way away and we know things can change, but I would say at the minute, when I think of similar levels, I'm probably thinking of a few bits here and there. I mean, we know we need to have one more benchmark MREL issuance before that goes live in 2027. I would say at the minute, we're assuming that funding remains relatively stable. It has been. Assuming that doesn't change, we are looking at sort of a few bits here and there. As we've sort of mentioned in the 2025 guidance, these factors of lending and funding are starting to stabilize. As you say, we see that continuing through 2026 as the sort of loan book, the back book impact is mitigated by the front book growth.

[Victoria Hyde, CFO at OSB Group]

Hopefully lending margin, the lending component stays broadly flat and then funding again relatively stable. TFSME will be gone by then. Yes, we're really talking modestly similar, but obviously we will update on that as we get through this year and on the interims. Naturally, we're striving to optimize and focus on every basis point. We're certainly looking to optimize 2026. Your question on capital, yes, I mean, we are, it's just over 1%. Yes, we look to keep to a glide path towards that just over 15%. You'll see once if you look at where we're landing, we've got the 100 million that will come out. We're confident on our ability to keep generating good returns and organic generation of capital. We'll assess sort of later in the year and for next year.

[Victoria Hyde, CFO at OSB Group]

We've been firmer on our dividend and the board is committed to return excess capital, but we will see that sort of drift down to the 14 in 2027.

[Grace Dargan, VP at Barclays]

Thank you.

[Operator]

Thank you. Next question is from Edward Firth, KBW. Please go ahead.

[Edward Firth, Managing Director at KBW]

Good morning, everybody. I just have two questions, actually. The first one is on consensus. I don't really like to ask questions about consensus, but there seems to be some confusion in the market this morning about what you're guiding to a downgrade or not for 2025. You sent us the numbers, so I might as well just ask you. The way I look at it, things cost a little bit higher than consensus, but other than that, everything looks to be broadly in line. My first question is, am I missing something there or not? That would be the first question.

[Edward Firth, Managing Director at KBW]

The second question is, on capital return, I mean, is there a maximum that you can do? I mean, obviously, physically, there must be a limit to what you can buy back. Because it just seems to me if Basel 3 is only going to be 1% now at 16, you're generating capital all the time. You're not growing very much. How do you physically actually get the capital back? I mean, do you ultimately just go for a special dividend? I mean, can you do more than the GBP 100 million, or have you been told that is the best you can do without disturbing the stock price? I mean, it seems to me there are challenges in getting that capital back.

[Edward Firth, Managing Director at KBW]

I just wonder how we should think about that in terms of the maximum you can do, the maximum buyback you can do, etc. Thanks very much.

[Victoria Hyde, CFO at OSB Group]

Yes, thanks. I'll take your question on consensus. Yes, we did publish our compile for 2025. When we look at those key metrics, NIM is around 224. Our guidance is circa 225, so I think we're aligned there. Again, ROE of about 13.5. I would say we are broadly aligned to consensus. I don't think, as you say, there's costs, yes, slightly up, but I would say there's no real themes that we're wildly different from.

[Andy Golding, CEO at OSB Group]

Okay, thanks, mate. I mean, [crosstalk] on the capital, I kind of share your curiosity around it.

[Andy Golding, CEO at OSB Group]

I mean, clearly, we want to get through a glide path to our target post-Basel 3.1 being fully implemented at 14%. We generate a fairly healthy chunk of capital every year, and we have increased the dividend over the next few years to demonstrate that we are really on board with our progressive dividend per share policy. GBP 100 million, it is a sizable buyback in terms of the volume of stock that was traded. I am not saying it is the maximum we could do, but given everything that is going on from a geopolitical perspective, given we have got to put a glide path in place to Basel 3.1, it seems like a sensible level.

[Andy Golding, CEO at OSB Group]

Of course, market opportunities, if they expand, we want to make sure we've got some capital power to drive to be able to take advantage of those opportunities if we see attractive ROTs to be made in the markets in which we operate. I think we're doing a good job at returning capital to shareholders. I think the dividend's meaningful. I think the buybacks are meaningful. I can't really say any more than the board is absolutely committed to where we can and it's appropriate returning that excess.

[Edward Firth, Managing Director at KBW]

Great. Thanks very much, indeed.

[Andy Golding, CEO at OSB Group]

Thanks, Ed.

[Operator]

Thank you. Just one final reminder for any further questions. Please press star one on your telephone keypad. [crosstalk]Sounds good. No further questions on the call.

[Andy Golding, CEO at OSB Group]

Okay. In that case, it sounds as if everyone's holding their powder dry for post-op 10:00 A.M., which is good because I think we will be able to share a lot more about the group and our future direction of travel. Thank you for joining this call this morning, and we look forward to speaking to many of you later on.

[Victoria Hyde, CFO at OSB Group]

Thank you.

Participants

Executives

• Andy Golding, CEO
• Victoria Hyde, CFO

Analysts

• Grace Dargan, VP at Barclays
• Edward Firth, Managing Director at KBW
• Benjamin Toms, Director of Equities at RBC