Challenger banks’ troubles are spreading as OneSavings Bank shares tumble amid tough market conditions
Under pressure: Profits at OneSavings Bank fell 30% to £374 million
Shares of OneSavings Bank fell sharply yesterday as it became the latest mid-market lender to feel the pressure of tough market conditions.
Profits fell 30 percent to £374 million as net interest margin – a key measure of profitability – came under pressure from a major change in borrower behavior last year.
However, the lender said margins would not be better this year, thanks to delays in passing on the impact of higher financing costs to customers.
That caused the shares to fall almost 30 percent at one point. They closed 73.8p, or 16 percent, lower at 387.2p.
The results came a day after Metro Bank, another challenger to Britain’s bigger lenders, announced cost cuts and job cuts as it battles to recover from a bailout deal last fall.
Elsewhere, Virgin Money has agreed to be taken over by Nationwide, Britain’s largest mortgage lender, Tesco Bank has been acquired by Barclays and Co-op Bank is in talks to be taken over by Coventry Building Society.
OneSavings Bank focuses mainly on buy-to-let and commercial lending.
The latest results reflect a £182 million hit revealed last summer, caused by borrowers’ changing behavior in response to interest rate movements.
Borrowers who exited fixed-rate deals were more likely to refinance new deals, spending less time at the higher “reversion” rate – the default rate when fixed terms end – than previously expected.
Yesterday’s results suggested the issue had abated, but this year it faces challenges including returning money to the Bank of England when it handed out £180 billion to the sector to support lending during the pandemic.
The bank grew its lending book by 9 percent to £26 billion last year, but expects this to slow to 5 percent by 2024.
At the same time, the costs of financing these loans are rising, says CEO Andy Golding.
Banks benefited from the rise in interest rates last year and the gap between their interest rates and the interest paid to savers, but are now seeing this return to more normal levels.
Peel Hunt analysts said the lower interest margins were likely to lead to a downward revision to earnings figures of more than 5 percent for this year, “with lower expectations likely for subsequent years.”