OSB Group H1 2025 Earnings Call Transcript

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Provided by Quartr
August 20, 2025

Key Takeaways

  • Positive Sentiment: OSB delivered a resilient H1 with £192m profit before tax, RoTE of 13.7%, net loan growth of 1.2%, and a 5% uplift in the interim dividend while progressing a £100m buyback.
  • Positive Sentiment: Key platforms are advancing: Instant Access launched on the new savings platform, the lending platform has been soft-launched, and rebranded products like Rely for buy-to-let have received strong broker feedback.
  • Negative Sentiment: Net interest margin eased to 2.30% in H1 as higher funding costs on the savings book only partially offset improved lending spreads, with cost of funds above expectations.
  • Neutral Sentiment: Administrative expenses rose 4% to £131.4m, driven by a £4m increase in transformation spend, keeping core cost growth to just 0.4% and full-year costs guided to around £270m.
  • Negative Sentiment: CET1 ratio remains robust at 15.7% post-dividend and buyback, but uncertainty over new MREL regime rules could affect future capital and funding requirements.
AI Generated. May Contain Errors.
Earnings Conference Call
OSB Group H1 2025
00:00 / 00:00

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Operator

Good morning, and welcome to the OSB Group twenty twenty five Interim Results Conference Call. Please note that this call is being recorded. All participants will be in listen only mode during the presentation. However, there will be an opportunity to ask questions following the prepared remarks. I will now turn the call over to Andy Golding, Chief Executive Officer. Please go ahead.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thank you. Good morning, and thank you for joining OSB Group's twenty twenty five interim results presentation. This morning, I'll take you through the key highlights for the first half of the year, provide an update on the strategy that we presented to you in March and insights into the macro drivers supporting our business. Then I'll hand over to Victoria for the financials in detail before returning to summarize and take you through the outlook. Starting with a high level view of the business. And in summary, we're on track.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

We set out our strategy to remain the number one specialist lender at our Investor Update in March and also provide a short and medium term targets. I'm very pleased with our delivery in the first half, which is in line with our expectations. As you can see on the right hand side, we are on track against all of our targets for 2025, building well towards our medium term plan. This slide highlights our three familiar themes that demonstrate progress against our strategy and reflect our current transitionary phase. Firstly, we set out in March our optimized lending growth plan, and we have delivered on this in the first half.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Net loan growth of 1.2% in the first half reflects our discipline in maintaining attractive ROEs of new lending as we face continued competition in certain product sets from high street lenders. Our medium term portfolio optimization strategy is reflected in the small 1% reduction in buy to less as a proportion of the loan book in the first half towards our target of less than 60%. As expected, net interest income has reduced compared to the first half of 'twenty four, and Victoria will cover this in more detail later. Our lending discipline is reflected in the low loan loss ratio benefiting from the depth of underwriting experience that we bring to all loans we make. Secondly, we maintain cost discipline and efficiency while also creating capacity for investment.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Our culture of challenging costs has contained core cost growth to only 0.4%. The elevated cost income and manage ratios are in line with our expectations. These reflect the impact of our transformation expenditure as we invest in the future of the business to deliver efficiency over the medium term. Finally, delivering attractive ROTEs and capital returns to shareholders continues to be our primary objective. Pounds 192,000,000 of profit before tax translates into an RoTE of 13.7% and a TNAV per share of 540p.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Our commitment to rewarding shareholders is underlined by the 5% increase in interim dividend and the good progress made on the 2025 buyback scheme. Overall, I'm pleased with our progress in the first half, and I'm confident we're on track to meet our targets in the first year of our two year transition plan. We presented our investor update in March and let me remind you of the plan that I believe will reinforce and build our position as the number one specialist lender. Through the planning horizon, we will leverage our core strengths of high quality and meaningful broker relationships, deep product and credit expertise and a track record of delivery at scale. All of this will be supported and accelerated by a significant tech transformation now well into its third year that takes us ahead of the pack that will enable us to grow more efficiently.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Combining this transformation with our key strengths will enable us to drive growth in our savings and lending platforms, accelerating our diversification into high yielding asset classes, delivering an optimized lending mix and with a more favorable cost of acquisition. In the medium term, this will cement our position as the number one specialist lender, delivering improved NIM, positive cost jaws and superior risk adjusted returns and driving shareholder value. We made good progress in the first half against our strategy, and our transformation program is on track. In savings, we've continued to launch more products on the new platform, most recently Instant Access. We're very pleased with the favorable response received from deposit customers and anticipate that this will continue as we progress towards offering a complete product set under the Keppel Alliance brand and commence the migration of existing KR accounts onto the new platform.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

On the lending side, we've soft launched our new platform, starting with buy select mortgages to a select number of intermediaries. This initial phase has been well received, with brokers appreciating the enhanced functionality and streamlined processes on the new platform. As we move into the second half, we continue the gradual rollout of the platform whilst taking onboard broker feedback to enhance the system further. As a first step in simplifying our mortgage offering, we have launched the Rely brand for buy to let. We've effectively created a buy to let powerhouse, drawing on the same expertise and experience that our broker partner will already be familiar with.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

And I'm pleased that we've already received some very encouraging feedback. Looking forward, we will focus on specialist residential lending and bridging finance under the Precise brand, and finally, commercial under the Interpay brand. I'm excited by the launch of Relay and the brand simplification strategy, which combined with our new lending platform will make life easier for brokers, removing friction from processes and allowing our business development teams to focus on adding value for our customers. Next, I'll turn to the broader markets and the key trends we've seen during the first half. Beginning with interest rates, we're pleased to see the bank base rate reduce in the first half, including the most recent cut earlier this month.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Lower rates should stimulate demand for borrowing across our lending segments. And whilst we have seen some volume growth in the first half, we expect that further reductions in rates from here would encourage more buyers into the market. Volumes across the buy to let market have gradually recovered over the first half as the fundamental indicators for professional landlords continue to show improvement, including a 7% increase in rents recorded in the twelve months to June. The bridging finance market has seen strong growth with application volumes up 55% at the start of the year. And whilst I'm sure that some of this growth was due to the ending of the stamp duty holiday in March, we're pleased that the continued strong appetite for bridging products that we see with its second quarter.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Commercial Property has also performed well, delivering average returns across the market of 4.2% in the first half, underpinned by a balance of capital appreciation and growth in rental returns. Finally, on the right hand side, I presented this chart last August to illustrate the level of competition we're experiencing in the buy select market, and the picture today is somewhat similar. We've continued to see elevated levels of competition in some of the more commoditized products in the market, particularly from current account funded high street competitors. However, as you can see across our three brands, we've continued to exercise pricing discipline, playing to our strengths of lending to professional landlords whose complex needs simply cannot be met by the High Street. Continuing the theme of lending discipline, the chart on this slide will be familiar to you from John Hall's presentation at our Investor Update.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

He described this as the graphic equalizer as it demonstrates how we actively balance the growth and composition of our lending book. We are very disciplined in how we choose to grow, deploying our expertise across all of the lending products, balancing returns and opportunity to optimize the composition of our book. As you can see here, we've delivered exactly as we said we would within our risk appetite and adjusting the mix to optimize returns across the portfolio, pursuing growth in a more focused way. Working down the chart, buy to let is a significant part of our business with professional landlords remaining a key focus. Specialist residential is an area of growth for us, but only with the appropriate level of return.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Momentum began to build in Q2 following the launch of new products and criteria adjustments, and I'm pleased that these changes have translated into a strong pipeline as we move into the second half of the year. Our focus on commercial is continuing to drive growth in originations, and we've achieved strong growth in asset finance, strengthened by our broader intermediary relationships that support customers to finance business critical assets. Bridging finance has also expanded significantly, representing 16% of originations in the first half, an increase from 12% last year. And Development Finance, whilst only 1% of the book, delivered 5% of our originations in the first half due to the continued benefit of our extensive client relationships. Taken together, I am pleased with our execution of the optimal growth plan we set out in March.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

This considered disciplined approach to growth is well embedded within the bank, and I look forward to providing further updates as we continue to deliver against the plan. Before handing over to Victoria, I want to summarize the key strengths of our business. We are the number one independent specialist lender operating in The UK secured finance arena. Our plans will ensure we maintain this position while producing the right returns. We operate a targeted secured lending strategy as an experienced and diversified lender with deep expertise and experience across a range of attractive segments.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

We offer a leading one stop shop for our intermediaries to meet their needs and their customers' needs, whether these are straightforward or more complex. We operate two well established retail savings platforms with a growing customer base and high levels of customer retention. This funding base has successfully enabled our growth over the years and will continue to do so. Finally, as you can see, we have won a number of industry awards this year for our achievements across our highly rated lending and savings propositions. With that, I'll hand over to Victoria for further insight into the financials.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Thank you, Andy, and good morning, everyone. Before we go into the detail, I wanted to start by saying that I'm pleased with these resilient financial results that are in line with our expectations, and we are on track for our 2025 guidance. So please note, this is the first time we are reporting our H1 twenty twenty five results on a statutory basis only as the final acquisition adjustments rolled off in December 2024. Turning first to the P and L, I will be talking to H2 twenty four on this slide as the prior period as this was the starting point of our plan. Let me call out a few key items.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Net interest income was £337,000,000 for the first half, up 8% versus h 02/24. However, excluding the final roll off of acquisition adjustments recorded in the prior period, the increase would be 3%. I will provide more color on the NIM dynamics on the next slide. The fair value loss on hedging activities was GBP 14,300,000.0 compared to a loss of GBP 7,400,000.0 in the prior period. The key driver behind the loss continued to be fair value movements on our pipeline mortgage swaps.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Administrative expenses were broadly flat, and an impairment charge of £2,000,000 was recognized this half year compared to an impairment credit of £7,000,000 in the prior period. I will cover both of these in more detail later on. Finally, profit before tax for the first six months of the year was £192,300,000 up 9% on prior period, and basic EPS was 37.3p per share, up 13%, both in line with our expectations. Looking at NIM period on period, note that H1 twenty four is on an underlying basis, stripping out the acquisition adjustments as this makes it a more meaningful comparator to H1 twenty five, which is on a statutory basis. NIM reduced from two forty three basis points in the 2024 to two thirty basis points this half year.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Higher cost of funds caused downward pressure period on period as our savings book continued to recycle onto more costly spreads versus Sonia compared to those in the same period last year. An improvement in lending spreads partially mitigated this as the back book dynamics rolled through and we started to see emerging benefits from higher yielding subsegments. We have also shown the H2 twenty twenty four reported NIM as a comparison. Excluding the acquisition adjustments, the NIM was two sixteen basis points. And as we noted in the investor update in March, this was two twenty five basis points excluding the EIR adjustment taken at the 2024.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Relative to H2 twenty twenty four, the NIM in the 2025 showed similar dynamics with improvements in lending margins mitigating increased cost of funding. For 2025, our net interest margin guidance remains unchanged at circa two twenty five basis points. Even though, as I have just said, we have seen some pressure on the funding side, we're also seeing better than expected lending spreads. This slide provides an overview of our strong funding franchise. The overall makeup of the group's funding remained broadly unchanged.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

As at the June 30, 88% of our total funding came from retail deposits that we raised under our two savings brands, Kent Reliance and Charter Savings Bank. Retail deposits grew by 3% in the first six months of the year, reaching over £24,500,000,000 We continue to optimize our funding mix and the proportion of our fixed rate bonds versus easy access accounts has reduced compared to year end. The Bank of England's TFSME drawings continue to reduce with a £730,000,000 repayment in the first half and a further £300,000,000 since then. We are comfortably on schedule to repay the final outstanding TFSME funding before the October deadline. The remainder of our funding comes from debt and wholesale issuances, providing diversification and duration to our funding requirements.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

The chart provides more context on the deposit market we're operating in, showing spreads to Sonya of the average top 10 quoted pay rates across the market for four key savings products. You can see this year that the average market spreads have moved above Sonia, including on easy access products. It has taken longer for the rate cuts to be reflected in the retail savings pricing and the market has been competitive, especially during the recent ISA season. This dynamic has been more pronounced in the 2025 with cost of funding above our original expectations. We continue to closely monitor and actively manage our deposit book.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Finally, I am pleased that in July, we received a domestic liquidity subgroup permission, or dole sub, from our regulator. This allows us, for the first time, to fully optimize our liquidity and funding at a group level, with all of our savings brands being able to support group wide lending. Moving on to costs. A key part of our plan is that we tightly manage our cost base to allow us to invest in our transformation. H one twenty twenty five demonstrates that we are doing this.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

This and the following page highlights our cost discipline and transformation spend. Administrative expenses were in line with expectations at a 131,400,000.0, up 4% compared to h one twenty four. There was a minimal increase in the core UK and India administrative expenses of only 0.4% compared to prior period. The main driver of the growth was the cost of the transformation program with a £4,000,000 increase compared to H1 twenty twenty four. On the next slide, we provide more detail on our spend to date.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

The cost to income ratio increased to 40.3% from 34.8% in the prior period, and the management expense ratio also increased to 88 basis points from 83 basis points, both in line with expectations. Looking forward, for H2 twenty twenty five, we will maintain strong cost discipline and continue to expect around £270,000,000 of administrative expenses. Core costs are expected to increase below the rate of inflation, while the investment in the transformation program will continue to increase in line with our projected rollout profile. Andy outlined earlier key milestones that we have achieved in our transformation program since we presented it to you in March. On this slide, we summarized our spend in the last year and a half for your reference.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

There is no change to the expected spend on the program until it completes in 2027. This slide presents our progress against the lending diversification strategy, combined with a disciplined approach to risk that we announced in March. As Andy mentioned earlier, we saw strong origination growth in the high yielding sub segments where we have existing expertise across commercial, asset finance, residential development and bridging. We continue to focus on the blended risk adjusted returns and the loan book mix optimization. As a result, even though buy to let remains the largest part of our lending book, it reduced to 69% of the total gross loan book as at thirtieth June twenty twenty five from the 70% at the 2024.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

You can see a refresher of our gross yields per segment, which remains aligned with those presented in the Investor Update in March. For 2025, we continue to expect net loan book growth of low single digits. This slide provides a waterfall of the movement in the impairment provision in the first half, as well as the credit quality metrics of our secured loan book. As you can see, there was a small net overall release of balance sheet ECL as macroeconomic scenarios, evaluation methodology alignments, model enhancements, and PMA updates were broadly offset by increases in provisions for accounts with arrears of three months or more and individually assessed provisions. Overall, the P and L charge totaled £2,000,000 which represented a loan loss ratio of two basis points compared to a credit of four basis points from the prior period.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

You can see that our balance sheet total coverage ratio has remained broadly flat at 49 basis points at the June compared with 50 basis points at the 2024, and our provision balance continues to be 10x higher than the average yearly write offs in the last five years. Moving on to arrears. For the first six months of twenty twenty five, three months plus arrears increased slightly to 1.8% from 1.7% at the 2024. The reason for the uptick continued to be the higher cost of borrowing that our customers experienced when refinancing onto current prevailing rates, and it was more evident for a small group of customers in our OSB buy to let segment. We remain comfortable with our risk profile and our impairment provisions.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

We show here that if we were to move our IFRS nine weighting 100 to our downside scenario, that our ECLs would only increase by GBP 39,000,000. Next, capital. This half demonstrated another period of strong capital generation. The group CET1 ratio remained robust at 15.7% at the June. Our profitability in the period increased the ratio about 1.2% and supported growth in the net loan book and the declared interim ordinary dividend.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Before the effect of the 100,000,000 share repurchase program announced in March, the CET1 would have been 16.5% and the share repurchase had a 0.8 impact on the rates growth. The group's RWAs increased largely as a result of net loan book growth and the change in loan book mix as we continue to diversify into higher yielding sub segments that utilize more RWAs. If Article 3.1 rules were applied to the June 30 balance sheet, the impact on our 15.7% CET1 ratio would be a reduction of 1.3%. The difference is largely attributable to the change in the group's loan book mix. We are seeking clarification from the Bank of England in respect to the recently announced changes to the MREL regime and its implications for the group's requirements.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

We are looking to better understand our position by the year end. In the meantime, the group will continue with its current capital and funding plans, which are reflected in our financial guidance and aspirations announced in March 2025. Just to finish on capital, we've included a TNAB walk in the appendix. I will now pass back to Andy.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thank you, Victoria. So in summary, today we have presented a resilient financial performance for the first half of the year, combined with good strategic progress. Our headroom to grow has been demonstrated by our 1.2% net loan book growth, and we have continued to shift the portfolio to optimize returns. There's been solid capital generation in the first half with attractive shareholder returns as we increased our interim dividend per share by 5%, and we have confidence in achieving our near and medium term guidance. And finally, to reiterate, at half one twenty twenty five, we are on track to deliver our 2025 targets of low single digit loan book growth and net interest margin of circa 2.25%, with administrative expenses of around $270,000,000 delivering a low teens RoTE.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

With that, we'll now turn over to questions. Operator, could we have the first question, please?

Operator

Thank you.

Operator

And the first question is from Grace Dargan at Barclays.

Grace Dargan
Vice President at Barclays Investment Bank

The first one I'd like to ask on RWAs because obviously the increase in the risk weight density was quite meaningful this period. Should we be extrapolating that and expect a similar pace going forward ex Basel impacts? Or are there other offsets we should be thinking about? And maybe linked to that, are you thinking about potential RWA optimization activities? And then the second one on IRB.

Grace Dargan
Vice President at Barclays Investment Bank

I appreciate the timing is very tricky. But how are you thinking about the potential benefits on the current balance sheet mix? Thank

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thank you, Grace. Victoria, happy to touch on those two.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Yes. So thanks, Grace. So the RWA, yes, as you've seen, we have had growth in the first half. We had better loan growth than we expected. And yes, some of that that density increased as we manage that graphically graphic equalizer of the higher high returning loans utilizing a little bit more capital.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

You know, as we did explain, we are managing that mix of lending according to optimize our returns. So, you know, we did set out our medium term aspirations. You know, we have got the back book rolling off. As we go through Basel, you know, with that uptick, the risk weightings do move around a bit. So we may well see some of that RWA density increase, but it will very much, you know, depend on the optimized loan returns at the point in time.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

But yes, mean it's not outside our expectations and obviously in our planning as we manage that mix it may well move about.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

I mean second point, Grace, I think was on IRB. I mean everything we do from a planning perspective right now is assuming the kind of Basel 3.1 standard approach and that's how we are thinking about it. We still continue to run the bank with the level of risk management, sophistication and modeling that we would as an IRB firm, and we continue to seek to engage with our regulator on IRB. But until we actually get some clarity on the duration of that journey, it's very difficult to start adding potential benefits for IRB, and I use the word potential carefully, very difficult to start adding those into the mix from a forecasting perspective. I don't think we can really say too much more than that at that point.

Grace Dargan
Vice President at Barclays Investment Bank

Okay. Thank you very much.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thanks, Chris.

Operator

The next question is from Edward Firth at KBW. Please go ahead.

Edward Firth
Managing Director at Keefe, Bruyette & Woods (KBW)

Hi. Good morning, everybody. Thanks for taking my my my I suppose my question was really about the margin because it seems you've turned the corner in the first half and really quite a big corner, particularly if you take out the EIR adjustment. Was more like two thirty five. But then if I look at your guidance, you seem to be implying then that we're going to be going backwards again in the second half. And so I'm just trying to work out where you feel we are in terms of the margin. Have we passed some sort of floor? And your guidance is just a reiteration of a target, which is understandably got some conservatism in it? Or are you telling us that actually this has just been a sort of one off in the first half and actually we're still waiting to see a proper turn?

Edward Firth
Managing Director at Keefe, Bruyette & Woods (KBW)

So that would be my first question. And then the second question is partly related to IRB. I noticed the Bank of England put out a consultation a couple of weeks ago talking about some sort of simplified IRB, which might allow challengers to compete in the vanilla mortgage market and accepting that the playing field has been so heavily weighted towards incumbents that it's not really been very fair. So I just wondered, have you had a look at that? Are you thinking about that? Have you had any talks with the bank thinking about that?

Edward Firth
Managing Director at Keefe, Bruyette & Woods (KBW)

Is that something that might attract you rather than going through the whole IRB process? Thanks so much.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thanks, Ed. Good morning. Thanks for your questions. If I pick off the simplified IRB one, yes, we've digested the documentation from the regulator. We're in the sort of UK finance working groups on that.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

I mean, clearly, if there is a more straightforward route, if we were able to qualify for a more straightforward route, we would absolutely want to be front and center of those discussions. But we will put together a well considered response to the consultation and hopefully influence the future thinking of the regulator. Yes, good spot. It's definitely one that's on our radar of interest without doubt. Vic, do you want to touch on the margin points?

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Yes. So on the margin, thanks Ed. So yes, in H1, lending margins did outperform our expectations. The back book has been more resilient. But as I've said, we have seen some cost of funding pressures.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

We are expecting those to last for a few more months as we approach the TFSME deadline. In terms of our guidance, we I think the key word here is the circa 02/25, you know, meaning that we expect some variation around this point. Reason for that, you know, when we look on a on a full year basis, you know, 5,000,000 of income is, you know, almost two basis points of NIM. You know, we've got an asset and liability book of sort of 25,000,000,000 each. So, know, NIM may well move around within a range.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

You know, and as we went through, you know, throughout our transition period, part of the reason, you know, we have to look at two two five this year and similar things in 2026 is there are different back book dynamics rolling through with both, you know, the high and the low margin portfolios that we talked about, you know, the mix shift as we move and and, you know, we'll optimize opportunities in the market across the different tenors and products. So, you know, for all of that, we're saying, you know, as we stand today, we are happy with circa 02/2025. You know, we feel that tweaking it a few basis points, know, all it's those moving parts is is a false level of precision, you know, at this point in the year. So that's why we're sort of, you know, happy with circa 02/25 as we look forward. And, you know, as we you know, as the year evolves and we come close to q three, you know, we will update you.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

I I think I would just add, Ed. I I think a lot of people sort of perceive that the MacBook NIV is a is a locked in static thing, actually, the the, you know, the MacBook is a big animal of month on month. It has different behavior, different redemption profiles, etcetera. We've done a pretty good job in H1 of compensating for a slightly elevated cost of funds with decent yields on the asset side of the equation through the changes in book mix. We have pretty good sight of the wash through of the back book that we talked about back in March when we set out that two year transition plan.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

And I think that's why we are saying the guidance is unchanged from that two twenty five position because there are lumps and bumps that run through the back book on the journey. So I just wanted to add that as well, Ed.

Operator

The next question is from Corinne Cunningham from Autonomous. Please go ahead.

Corinne Cunningham
Partner - Credit Research at Autonomous Research

Good morning, everyone. Couple of questions on MREL, please. Do you think there's any reason why you would not be able to qualify as a transfer bank once the new rules come into play? And then if you did end up qualifying as a transfer bank, how would you expect to manage that transition in terms of the outstanding senior debt that you have? Thank

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thank you. I knew that question was going to come, and I have blow straight back on this one. Clearly, as you would expect, yes, we are in dialogue with the Bank of England and the PRA around the publication and the potential for an impact on OSB, but we don't have responses on that yet, and therefore, it would be inappropriate for us to speculate around what that could, should or might mean. As soon as we've got some clarity on it, clearly, will seek to update the market, but there isn't anything further we can say on that at this stage.

Corinne Cunningham
Partner - Credit Research at Autonomous Research

Thank you. Can I just add in terms of when would you expect to hear? What sort of timing we're looking at?

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Well, we know that there is commitment for something by the end of the year with the Bank of England, is about our resolution strategy, full stop. We would hope to have heard before the end of this year and be able clarify one way or another to the market at that point.

Operator

The next question is from Jonathan Pierce at Jefferies. Please go ahead.

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

Yes. Good morning, both. I've got two questions, actually. The first is on the deposit margin. Can I maybe encourage you moving forward to actually disclose that number like Paragon does because it's obviously an important driver of the group margin?

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

But ahead of that, could you confirm, I think we can use Page 50 to roughly work out that the deposit margin in the first half was about 20 basis points positive, so it's contributing. Is that broadly the right number? And where do you see that going? Because obviously, your chart in the presentation suggests that most products have now been written flat, if not slightly, above Sonia. The second question is on sorry, it's on MREL again.

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

Obviously, we'll wait to see what options you might have with that. But how are you thinking about those options? Were they to become available to you? I'm thinking here in particular regard to tendering early versus buybacks. How would you think about that?

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

But then also liquidity position, because your LCR has dropped 40 percentage points in the first half. How would you actually replace that funding if you did get rid of the MREL? Would you just use the ILCR more significantly? So how are thinking about that? That would be helpful, please.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Yes, sure. I mean, I'll touch on the MREL point. I mean, I don't want to be overly drawn on it because it is something that, you know, clearly, we need to work through with our regulators. But I mean clearly you would go through a process over time of retiring existing instruments if you no longer needed them. And there aren't huge cliffs that would be complicated for us to fund in other ways either through wholesale as highlighted and that's a mix of securitization and index long term repo or through the general use of the retail funding in that way.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

But I'm the liquidity aspect of it would be the least concerning aspect from our perspective. We manage our LCR's cautiously and carefully. We are a highly liquid organization. We're predominantly retail funded. And we have access to various Bank of England schemes and have done a pretty crappy job of paying down the majority of our TFSME on the way through using those various funding sources.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

That part of it, we're not concerned about. Vic, do you want to touch on the margin,

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Yes. So on the deposit margin, Jonathan, I mean, as you say, we have seen when we look at last year, we were raising about Sonia Flats. So we are seeing that recycling through to slightly higher spreads. We will take a look at the disclosures. We're always thinking about how we can involve those, so we will take that point on board.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Q1 was in line with our expectations, you know, always running. And then in Q2, we did see that inflation. I guess the book was recycling anyway, you know, year on year to a slightly more expensive blended cost of liabilities. We assume that that will, know, as you say on the chart, we have shown that currently most of the spreads are above Sonia. We are assuming for H2 that that will continue. In terms of where that peaks, there is that recycling.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

We as we said in March, our transformation, you know, areas like the dole sub where we can more efficiently optimize our funding opportunities, looking at the product mix and the faster repricing. So over time, we do expect that to stabilize and then, obviously, market factors will always be there, but transformation benefits and our evolution will help us bring down that cost of funding over time. So for the minute, we, you know, as we said, loan spreads are more than mitigating that increased cost of funding, and then we see it, you know, stabilizing, and then the transformation should help optimize and bring it back down again.

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

Okay. That that's helpful. Thank you. But can I just can I just press you on what the margin on the stock is at the moment? I mean, rather than the flow. So page 50 tells us you're paying 517,000,000 on the retail deposits as a small expense on swaps against the term book. But it looks like the all in blended cost is about 4.3, and that is below where Tonya was in in in the first half of year on average. So is the stock at the moment generating you a 20 basis point positive margin?

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

And is that significantly falling in the second half that's taking margin down group margin down?

Victoria Hyde
Victoria Hyde
CFO at OSB Group

I guess that's something we've not ever disclosed before, Jonathan. So I mean, I don't think I'm going to say anything more on that. I mean, yeah, we, you know, we can work with you offline, I guess that's that's not something that we've disclosed.

Jonathan Pierce
Jonathan Pierce
Equity Analyst at Jefferies

Understood. It'd be good to get that disclosure there if we can moving forward, so that would be helpful.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Yeah.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

I'll take the email of the solution.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

No. Thank you. We will we'll take that point on board and look at that. John.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Thanks, John.

Operator

You. The last question in the queue is from Benjamin Thompson, RBC. Please go ahead.

Benjamin Toms
Benjamin Toms
Director - Equities at RBC Capital Markets

Thank you for taking my questions. First one is on Basel, where your impact has increased by 30 basis points versus the full year. I'm just interested in your expectations of how that number might move from here given that you expect further balance sheet growth and further mix shift. Is your expectation that resi growth coming through will provide an offset to further growth in this impact as we move towards 2027? And then secondly, your intangible assets grew 19% in the half.

Benjamin Toms
Benjamin Toms
Director - Equities at RBC Capital Markets

Should we expect a similar pace of growth from here? I'm just thinking about how this might impact capital from here as you switch cash for intangibles. Thank you.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Yes. So thanks, Ben. As you say, so when we the Basel impact, so we've calculated it as at the balance sheet today and that has been the driver of the slight mix shift. Looking forward, we will every six months reevaluate that. The impact at the point of transition will very much depend on our mix at that point of time.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

It is something that we take account of when we're looking at pricing, when we're looking at planning. But managing that graphic equalizer, as you say, we are looking at growth in residential and that has a lower risk weight under Basel. We know buy to let, again, will vary based on the LTV band. So it's very hard to say as we stand now and hence why we we've always declared this as at the the current balance sheet, which is a firmer number of where, you know, what we expect current. But as you say, you know, the the there are ups and downs in this.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

So I would stick to, you know, the 1.3% as we've said now as as a go forward guide, and then we will update, you know, at, you know, at our reporting periods. I think that's the best way to take it from from here. On the intangible, yes, as you said, I think that is some of the consensus difference we have is the finer points in the CET1 around the intangible assets. So we I think in March, we did sort of give more of a guide as to how we expected the spend to go. So we probably will see some continued uptick in that intangible asset as we go on.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

But I would say, you know, part of our cost in H2 will be higher because we are starting to amortize that now that lending has gone live. So, yes, there will be, you know, some continued growth as we invest, but it will also start to be amortized through. So, yeah, I I think, you know, a continued increase, and then we will update. You should see the peak now in the future, and then it will start to come down again.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

I think in the investor update, there's there's a pretty clear chart on how the, you know, how the capital and the amortization profile of the transformation spend plays out. So we'll reference you back to that one as well.

Victoria Hyde
Victoria Hyde
CFO at OSB Group

Yes.

Operator

You. Thanks, Ben. And we have no further questions in the queue at this time.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Okay.

Andrew Golding
Andrew Golding
CEO & Director at OSB Group

Well, on that basis, I will, thank everyone for, listening and attending, and, look forward to catching up with a number of you in due course. Thank you very much.

Operator

This concludes today's conference. Thank you all very much for joining, and you may now disconnect.

Executives
    • Andrew Golding
      Andrew Golding
      CEO & Director
    • Victoria Hyde
      Victoria Hyde
      CFO
Analysts
    • Grace Dargan
      Vice President at Barclays Investment Bank
    • Edward Firth
      Managing Director at Keefe, Bruyette & Woods (KBW)
    • Corinne Cunningham
      Partner - Credit Research at Autonomous Research
    • Jonathan Pierce
      Equity Analyst at Jefferies
    • Benjamin Toms
      Director - Equities at RBC Capital Markets
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