TIDMOSB
LEI: 213800ZBKL9BHSL2K459
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION
6 July 2023
Trading update
OSB GROUP PLC (OSBG or the Group), the specialist lending and
retail savings Group, today issues a trading update ahead of its
2023 interim results.
-- The Group remains on track to deliver c.7% growth in its underlying net
loan book for 2023
-- A reduction in the expected time spent on the reversion rate by Precise
Mortgages customers is estimated to result in an adverse underlying
effective interest rate (EIR) adjustment of GBP160m to GBP180m in the
first half of 2023
-- Excluding this EIR adjustment, the underlying net interest margin (NIM)
for the first half of 2023 is anticipated to be marginally ahead of
expectation. Second half NIM is anticipated to be broadly flat to 2022
-- Administrative expenses in the first half of 2023 are slightly below
expectation
-- The Group's capital and liquidity positions remain strong
As the first half of 2023 progressed, the Group observed a step
change in the behaviour of Precise Mortgages owner-occupied and
Buy-to-Let customers reaching the end of their initial fixed term.
As interest rates have continued to rise, leading to further
increases in the Bank Base Rate (BBR) linked reversion rate, and as
the Group continued to develop its Precise retention programme,
customers are choosing to refinance earlier and spend less time on
the higher reversion rate than expected, compared to previously
observed behavioural trends.
In line with IFRS 9, the Group applies the effective interest
rate (EIR) methodology to revenue recognition. This method seeks to
recognise interest income evenly over the expected life of a
mortgage, based on expected future cash flows and taking into
account behavioural aspects, including time spent on the reversion
rate, in addition to contractual terms. The Group uses observed
trends in customer behaviour to periodically update modelled
assumptions for the expected time spent on the higher reversion
rate. Once a change in customer behaviour becomes apparent, and is
expected to persist, the Group is required to recognise an
immediate adjustment to the carrying value of the loan book through
net interest income.
Significant judgement is required in estimating how long
customers will spend on the higher reversion rate in the future.
The Group has reviewed customer behaviour in the first half of the
year and has revised the expected future behaviour of Precise
Mortgages customers once they reach the end of their initial fixed
rate period. Consequently, the Group anticipates that Precise
Mortgages customers will now spend an average of five months on the
reversion rate and the reduction in the reversion period will lead
to an estimated adverse EIR adjustment of GBP160m to GBP180m on an
underlying basis in the first half of 2023.
OSBG will release its half year results for the six months ended
30 June 2023 on 10 August 2023.
Enquiries:
OSB GROUP PLC Brunswick Group
Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
Background information about the Group's core brands
The Precise Mortgages brand was acquired through the Combination
of OneSavings Bank and Charter Court Financial Services in 2019.
Its Buy-to-Let and Residential mortgages were designed to offer a
modest step-up in reversion rate, linked to BBR, at product
maturity versus the initial fixed rate and open market rates.
Borrowers typically spend a period of time on the reversion rate
before choosing a new product or a new mortgage provider. The
step-up in the reversion rate has increased materially as a result
of the rapid rise in BBR resulting in borrowers refinancing more
quickly. In October 2022, the Group established a proactive
retention programme for Precise Mortgages borrowers, similar to the
Choices programme in Kent Reliance, leading to an improved
retention rate in the first half.
The Kent Reliance (KR) brand has historically had a materially
higher reversion rate linked to its standard variable rate (SVR),
resulting in a significant step-up to the reversion rate versus the
initial fixed and open market rates, leading to borrowers
refinancing more quickly. Kent Reliance has a well- established
broker led retention programme, Choices, to encourage borrowers to
switch to a new product quickly rather than refinance away from the
Group after a period on the higher reversion rate. The behaviour of
KR customers in reversion is therefore less sensitive to increasing
interest rates than for Precise customers. The Choices programme
has been successful in retaining borrowers by engaging with them
before the end of their fixed term and offering preferential rates
compared with new customer rates to reflect the Group's lower
processing costs. In 2022, 72% of borrowers chose a new KR product
within 3 months of their product maturing.
Background information on EIR accounting for mortgages
In accordance with IFRS 9, the Group recognises interest income
from mortgages using the effective interest rate (EIR) method,
which aims to recognise interest income evenly over the expected
life of the mortgages.
The EIR method requires that an effective interest rate is
calculated at origination, that considers all contractual and
behavioural cash flows associated with the mortgage, including
fees, early redemption charges and the average time the customer
spends on the reversion rate after the initial fixed rate period.
This has the effect of bringing forward expected income from the
reversion period.
The reversion rate is linked to BBR and if this remains static,
there is no change to the EIR calculated at origination.
If BBR increases, the EIR methodology prescribes that the EIR is
recalculated immediately to reflect the higher anticipated income
in the reversion period, which leads to higher revenue recognition
over the expected remaining life of the mortgage.
A change in customer behaviour which emerges over time, for
example customers spending less time on the reversion rate before
refinancing, can also lead to a change in the expected revenue to
be recognised. Such a change would cause a reduction in the
anticipated total amount of interest received from the customer
over the revised expected life of the mortgage. Similarly, an
expectation of a longer period spent on the reversion rate would
lead to an increase in the anticipated total amount of interest
received over the revised, longer life of a mortgage.
Once a trend in customer behaviour is observed, the EIR
accounting treatment for such behavioural changes requires an
immediate adjustment to the carrying value of loans and advances to
customers, to reflect the present value of the revised future cash
flows discounted at the latest EIR, which reflects current rates,
with a corresponding gain or loss recognised in the income
statement.
In the current rapidly rising rate environment, changes in BBR
are observable immediately and are reflected in revised EIRs,
whereas trends in customer behaviour take more time to emerge. This
will result in a dynamic where a behavioural-driven adjustment, for
example due to customers spending less time on the higher reversion
rate, is in part providing for future income not yet recognised,
due to the EIR (and future interest accruals) still reflecting the
amount of time customers were originally expected to spend on
revert.
About OSB GROUP PLC
OneSavings Bank plc (OSB) began trading as a bank on 1 February
2011 and was admitted to the main market of the London Stock
Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in
June 2015. On 4 October 2019, OSB acquired Charter Court Financial
Services Group plc (CCFS) and its subsidiary businesses. On 30
November 2020, OSB GROUP PLC became the listed entity and holding
company for the OSB Group. The Group provides specialist lending
and retail savings and is authorised by the Prudential Regulation
Authority, part of the Bank of England, and regulated by the
Financial Conduct Authority and Prudential Regulation Authority.
The Group reports under two segments, OneSavings Bank and Charter
Court Financial Services.
OneSavings Bank (OSB)
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take
a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending,
secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through
the long-established Kent Reliance name, which includes online and
postal channels as well as a network of branches in the South East
of England. Diversification of funding is currently provided by
securitisation programmes and the Bank of England's Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group (CCFS)
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise and
best-of-breed automated technology and systems, ensuring efficient
processing, strong credit and collateral risk control and speed of
product development and innovation. These factors have enabled
strong balance sheet growth whilst maintaining high credit quality
mortgage assets.
CCFS is predominantly funded by retail savings originated
through its Charter Savings Bank brand. Diversification of funding
is currently provided by securitisation programmes and the Bank of
England's Term Funding Scheme with additional incentives for
SMEs.
(END) Dow Jones Newswires
July 06, 2023 12:22 ET (16:22 GMT)
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