OSB Group H2 2024 Earnings Call Transcript

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March 13, 2025

There are 5 speakers on the call.

Operator

Good morning, everyone, and thank you for joining OSP Group's twenty twenty four preliminary results presentation. I'm pleased to present this morning's results to you and excited to regroup at 10AM 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.

Operator

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 ROE on new lending during a period of high competition against a backdrop of a broadly subdued market in volume terms. During the year, some lenders have elected to drop pricing to a level below those to deliver our target returns. And 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.

Operator

And this is reflective of our pricing discipline. Our net interest margin of two thirty basis points is inclusive of further EIR adjustment of $15,900,000 reflects the transitionary impacts of lower prevailing 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. Secondly, we've maintained our cost discipline and efficiency while also investing in our future.

Operator

Our cost to income ratio is broadly in line with our expectations of 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 Cambria Alliance 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.

Operator

Finally, delivering attractive ROE and cash returns to shareholders continues to be our primary objective. The underlying $443,000,000 pretax profit for the year translates into a 16% ROE, which together with a strong CET1 ratio underpins our ability to return capital to shareholders. In 2024, we completed £250,000,000 buybacks and are confirming today a 5% increase in our full year 2024 dividend to 33.6p per share, consistent with our progressive dividend policy. This equates to a total return to shareholders of $226,000,000 in the year, including the buybacks undertaken. I'm also delighted to announce a further share buyback of 100,000,000 over the next twelve months, which will commence tomorrow and further demonstrates the board's continued commitment to return excess capital to shareholders and efficient capital management.

Operator

I'll now hand over to Victoria to walk you through the financials in more detail.

Speaker 1

Thank you, Andy. Turning first to the P and 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 NIMS slide. These dynamics were partially offset by the non recurrence of the adverse effective interest rate adjustment recognized in 2023.

Speaker 1

Fair value losses on the pipeline mortgage swaps reduced in 2024 compared with prior year mainly due to movements in the Sonya forward curve which will reverse over the life of the swaps. We also incurred a 2,400,000.0 loss on sale from the £1,250,000,000 December securitization and deconsolidation transaction. I'll cover administrative expenses and impairment later in this presentation. This resulted in a bottom line bottom line underlying profit before tax of £443,000,000 an increase 4% on the prior year. Underlying earnings per share of 82.2p increased due to the higher profit for the year and the lower share count following the $250,000,000 buybacks announced in 2024.

Speaker 1

The next slide summarizes our strong secured balance sheet. Net loan book reduced by 2% in the year to £25,100,000,000 reflecting the derecognition of 1,250,000,000.00 of precise buy select mortgages following securitization in December. Adjusting for this transaction, the loan book would have would have increased by 2.5% supported by 4,000,000,000 of originations, which decreased by 700,000,000 from the prior period reflecting our disciplined approach to new lending. Retail deposits grew by 8% to almost 24,000,000,000 as of the December 31 as the group continued to attract new savers. This in turn allowed us to continue the repayment of our drawings under the Bank of England's TFSME scheme which stood at £1,400,000,000 at year end.

Speaker 1

We have since continued to make further repayments and as of today we have just under £800,000,000 remaining and we are comfortable with our plan to repay fully by October 2025. You can see that MREL debt increased by circa £400,000,000 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 remains 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. Interest coverage ratios for buy to less originations in the year strengthened, reflecting a moderation in mortgage pricing and growth in rental income.

Speaker 1

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.

Speaker 1

As we reach 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. This slide presents the net interest margin dynamics from the December 2023 exit rate of two seventy three 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 15,900,000.0 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.

Speaker 1

Our fixed rate deposit book continued recycling onto tighter spreads than those that prevailed throughout much of 2023 and that were written at a volatile period at the end of twenty twenty two. In January, we issued £400,000,000 of MREL qualifying debt securities, which diluted NIM by eight basis points versus the December exit rate. We are now carrying a total of £950,000,000 of NREL 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 two twenty five basis points as both the lending spreads and net funding impacts on our overall NIM began to stabilize in the second half of twenty twenty four.

Speaker 1

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 £27,000,000 at the year end for a two month reduction in the weighted average life on reversion. This sensitivity is expected to decrease by a further circa 10,000,000 by the end of twenty twenty five. I'm 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 manage the cost base in an inflationary environment whilst investing in transformation.

Speaker 1

The admin expense is $257,000,000 and a cost to income ratio of 37% on an underlying basis came broadly in line with our expectations. The group's core UK 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 £4,500,000 As at the December 31, the group's number of employees was broadly flat to the prior year. The new Bank of England Levy added £3,300,000 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 9,900,000.0 as the intensity of delivery ramped up.

Speaker 1

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 £270,000,000 of admin expenses in 2025. Within this, core costs which were £238,000,000 in 2024 are expected to increase 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.

Speaker 1

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 h two, particularly in respect of house crisis, led to a 36,200,000 provision release in the year. With a further 7,900,000 release was a reduction in post model adjustments. Changes in arrears led to a charge of 10,800,000.0 although I note the growth of the rate of growth slowed significantly in the second half and a further charge of £8,400,000 related to changes in the credit profile of borrowers as they transition through modeled IFRS nine 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 twenty nineteen.

Speaker 1

Or to give another sense of perspective, our ECL balance sheet provision is more than 10 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 CET1 ratio remained strong at 16.3% at the December. The waterfall illustrates our strong capital generation from profitability of 2.7%, the 0.5% release 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 Three Point One which we now expect to reduce our CET1 ratio by just over 1% if it had been fully implemented on the 12/31/2024, a smaller impact compared to our previous guidance of just under 2%.

Speaker 1

This improvement is largely due to a favorable clarification of the property revaluation rules for determining LTV banding. Today, the Board has announced a new £100,000,000 share buyback to commence tomorrow, expected to complete over the next twelve months. The quantum of impact on CET1 ratio will be similar to the buybacks in the prior year at circa 0.9%. 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 Three Point One rules.

Speaker 1

Thank you. I will now pass back to Andy.

Operator

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 stabilized 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.

Operator

So during 2025, we'll continue to work towards optimizing the lending book and delivering a diversified portfolio, growing into high yielding segments. John Hall, our MD 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 two twenty five basis points and we anticipate £270,000,000 worth of administrative expenses in the year as we continue to invest in the business. And again, we'll tell you more about our transformation program later on.

Operator

We anticipate that this guidance will deliver a low teens ROTE in '25 and later we'll set out our plans to improve this as we look ahead. In the meantime, we'll continue to prioritize returns to shareholders with the increase in the dividend per share by 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.

Operator

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 updates are on the slide and available on our website. And I do hope you're able to join us at 10:00. With that, we'll now turn over to Q and A, but I would be grateful if you could limit your questions to twenty twenty four and the near term guidance.

Operator

Operator, could we open up for questions, please? Thank

Speaker 2

you. First question on the line is from Benjamin Tom at RBC. Please go ahead.

Speaker 3

Thank you for taking my questions. It's incredibly difficult 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.

Speaker 3

Is that the right way to think about it? And would you expect NIM to build as we come out of 2026? And then 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 falling from there? And can you talk a little bit about what that investment spend is being spent on in the next couple of years?

Speaker 3

Is it investment in tech capabilities, facilitating volumes? Or is it investment in efficiency allowing you to generate cost saves? Thank you.

Operator

Thanks, Ben. I mean, I'll I'll touch on the the NIM point because, actually, I I share your thought process and I and I don't disagree with you at all. I mean, clearly, we have to give guidance based on what we see today in terms of kind of cost 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 the strong yields that we're putting on at the front end. But, yeah, I mean, you know, we we all know that as interest rates come off, OSB historically, has seen improvement and is near as as interest rates reduce. And and as you say, there are probably, potentially a few tailwinds, but, we have to guide on what we see today because, you know, there's a lot going on in the geopolitical environment and and the macro economy that we're not in control of.

Operator

So hopefully, that touches on the midpoint. Vic, do you want to talk about the cost?

Speaker 1

Yes. So I was going to say, Ben, you will see a lot more on this, at 10AM. But I would say, yes. Our our investment spend, I guess, you know, we'll give you all the details about our transformation program. But, yeah, I would I would agree with your general sentiment that, yes, we have, you know, an increase in that cost, through our transition period, and then that will taper off and it will drive further efficiency.

Speaker 1

In terms of where that spend is, yes, it is, you know, tech capability. I'd say we we, you know, we are looking to to change the way, our cost is structured and be more tech enabled to, you know, create operational leverage for the future. But I would say there is an awful lot that you'll find out on that at 10AM. So, we will give you a lot more detail and answer all of those those questions and more hopefully in the next session. Thank you.

Operator

Thanks, Anne.

Speaker 1

Thank you.

Operator

The next question

Speaker 2

is from Grace Dargan at Barclays. Please go ahead.

Speaker 4

Good morning. Thanks both for doing this call now. If I could just come back on NIM and then ask around capital return. So on the 26 NIM guide, I guess you're talking about similar levels to 25. How could we interpret similar levels?

Speaker 4

Are you talking a couple of bits here and there? Or are we talking more of a range of two twenty to two thirty? How you're thinking about that? And then secondly, on the commitment to return excess capital, I mean, that's great. How should we be thinking about the pace of that?

Speaker 4

And I guess, noting your comments, should we be thinking about just a pay down to 15% at least until Jan twenty seven? Thank you.

Speaker 1

Okay. So, yeah, obviously, Grace, twenty twenty six 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 bips here and there. I mean, we know we need you know, we have one more benchmark MREL issuance before that goes live in 2027. And I would say at the minute, you know, we're assuming that funding remains relatively stable.

Speaker 1

It has been. So assuming that doesn't change, we are we are looking at sort of a few bips here and there. As as we've sort of mentioned the 2025 guidance, these factors of lending and funding are starting to stabilize. And as you say, we, we see that continuing through 2026 as as the sort of loan book. The back book impact is mitigated by the front book growth.

Speaker 1

So hopefully, you know, lending margin stays the lending component stays broadly flat and then funding again relatively stable. The TFSME will be gone by then. So, yes, we we're really talking modest modestly similar. But, obviously, we, you know, we will update on that as we get through this year on the interims. And, naturally, we will, we're striving to optimize and focus on every every basis point.

Speaker 1

So, you know, we we're certainly looking to, to optimize 2026. And then your question on capital, yes. I mean, we are, know, it's just over 1%. So, yes, we we we look to keep to a guide path guide the path towards that, just over 15. You know, you'll see once if you look at where we're landing, you know, we've got the hundred million that will come out.

Speaker 1

You know, we're confident on our ability to keep generating good returns and, you know, organic generation of capital, and then we'll assess sort of later in the, you know, later in the year or for next year. You know, we've 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.

Speaker 4

Thank you.

Speaker 2

Thank you. Our next question is from Edward Furth, KBW. Please go ahead.

Speaker 4

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 seems to be some confusion in the market this morning about what you're guiding to a downgrade or not for 2025. And so I just you sent us the numbers, so I might as well just ask you to expect the way I look at it, I think the cost is a little bit higher than consensus.

Speaker 4

But other than that, everything looks to be broadly in line. So my first question is, am I missing something there or not? That would be the first question. And then 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.

Speaker 4

Because it just seems to me that if Basel III is only going to be 1% now at 16, it's you're generating capital all the time. You're not growing very much. I don't how do you physically actually get the capital back? I mean, do you ultimately just go for a special dividend? Or I mean, can you do more than the $100,000,000 or have you been told that is the least you can do without disturbing the stock price?

Speaker 4

I mean, what what how how do you seems to me there are challenges in getting that capital back, and I just wonder how how we should think about that in terms of the maximum you can do, the maximum buyback you can do, etcetera. Thanks very much.

Speaker 1

Yes. So thanks, Ed. I'll take your question on consensus. So, yes, we did publish our, company comp company compart 2025. You know, when we look at those key metrics, you know, NIM is around 02/20, '2 '20 '4.

Speaker 1

So, yes, I mean, our guidance is circa 02/25, so I think we're aligned there. And again, yeah, our RO ROE of about 13.5. So I would say we are, you know, broadly aligned to consensus. So I don't think, as you say, there's costs, yes, you know, slightly slightly up, but I would say there's no real themes, I think, that, that we're wildly different from.

Operator

Okay. Thanks, Vikram. I mean, on the account, I I I kind of, I share your your curiosity around that. I mean, clearly, we we want to get through a glide path to our target post Basel three point one being fully implemented at 14%. We generate a fairly healthy chunk of capital every year, and we've increased the dividend over the next few years to demonstrate that we're really on board with our progressive dividend per share policy.

Operator

And a hundred million, you know, it's a sizable buyback in in terms of the volume of stock that was traded. I'm not saying it's the maximum we could do, but but given everything that's going on from a geopolitical perspective, given we have got to put a glide path in place to to Basel 3.1, it seems like a a sensible level. And, of course, market opportunities, if they expand, we wanna 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 in the markets in which we operate. So, I I think we're doing a good job at returning capital to shareholders. I think the dividend's meaningful.

Operator

I think the buybacks are meaningful. And I can't really say any more than the board is absolutely committed to where we can and it's appropriate returning that excess.

Speaker 4

Great. Thanks so much indeed.

Operator

Thanks, Ed.

Speaker 2

Thank you. So just one final reminder for any further questions. Please press star one on your telephone keypad.

Operator

Sounds good.

Speaker 2

No further questions on the call.

Operator

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

Speaker 1

Thank you.

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OSB Group H2 2024
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