OneSavings Bank PLC

OneSavings Bank PLC (LON: OSB) is a financial services company regulated by the Prudential Regulation Authority and Financial Conduct Authority. The group provides retail savings and lending services to its clients.

Financial Highlights (for the year ended 31^st December 2019)
For the financial year, the statutory profit before tax surged by 14% to £209.1 millionas compared with the previous year (2018: restated £182.8 million), while it also increased by 9% to £381.1 million on a proforma basis. Excluding the impact of structured asset sales, the net loan book increased by 16% to £18.2 billion (2018: £15.6 billion) on a pro forma underlying basis and surged by 105% to £18.4 billion (2018: £9 billion) on a statutory basis. Statutory gross originations for FY19 increased by 36% to £4.1 million against the previous year (2018: £3 billion) and rose by 10% to £6.5 billion on a pro forma underlying basis. Led by decent income growth alongside a continued focus on cost discipline and efficiency, the proforma underlying cost to income ratio increased by 29% as compared with the financial year 2018 of 28%. Whilst the cost to income ratio surged to 32% on a statutory basis. On a statutory and pro forma underlying basis, the net interest margin (NIM) stood at 2.43% and 2.66% in FY19. The company has low impairments charges with a loan loss ratio of 10bps on a pro forma underlying basis and 3bps on a statutory basis. Statutory Common Equity Tier 1 (CET1) capital ratio surged to 16.0% in FY19 (2018: 13.3%). The Board has proposed a final dividend per share of 11.2 pence, representing a total dividend per share of 16.1 pence.

Share Price Performance
 
Daily Chart as on 2nd April 2020, after the market closed (Source: Thomson Reuters)

On 2nd April 2020, OneSavings Bank PLC’s share closed at GBX 190, a decrease of 7.23 per cent, as compared to the previous day’s closing price. Stock's 52 weeks High and Low are GBX 461.00/GBX 155.30.

Valuation Methodology

*Peers: Lloyds Banking Group PLC, Provident Financial PLC, Royal Bank of Scotland Group PLC, and Paragon Banking Group PLC.

Key Risks
The value of loan collateral might also decline due to falling property prices, household disposable income decreases, thus impacting the financials of the group. Moreover, a fall in interest rates can lead to a fall in net interest margin, which can further deteriorate profitability. During an economic slowdown, expansion plans in the country would stop, limiting demand for new loans and impacting the repayment capacity of borrowers. Recently, the UK and international economies are experiencing unprecedented uncertainty stemming from COVID-19.

Conclusion
The company has a decent start to the year 2020.The company is well-positioned to continue supporting the consumers and clients in a broad range of market conditions. As the pressure on the Bank of England grows to reduce benchmark interest rates, the net interest margin of the group was a decline, which would hurt the profitability. The company recognises uncertainties in the external economic and political environment, and profitability margins have remained stagnant or declined. The outbreak of Coronavirus has now been labelled an international pandemic by the WHO (World Health Organisation). If this continues to spread through contagion, it is likely to further intensify the disruptive impact on the global and UK economy. From this global pandemic, the financial services sector would adversely be impacted because of deteriorating credit risk profile, market uncertainty, declining liquidity and curtailed operational capacity, while this would also decrease the company’s financial performance.

Based on the headwinds faced by the group and valuation as done above, we have given a "WATCH" recommendation at the closing price of GBX 190.00 (as on 2^nd April 2020), while we look for any upcoming catalysts in the near term.

Provident Financial PLC

United Kingdom-based Provident Financial PLC (LON: PFG) is a financial services company engaged in the business of consumer lending. Its areas of operations are divided into segments like Vanquis Bank, CCD and Moneybarn.
On 7^th May 2020, the company will announce its Q1 IMS/AGM.

COVID-19 and Dividend Update (as on 27^th March 2020)
Presently, the UK and international economies are experiencing unprecedented uncertainty due to COVID-19.Given the Government's recent measures, the company has temporarily paused the face-to-face visits in the home credit business. Through SMS, phone, and online to support clients, the CEMs (Customer Experience Managers) are maintaining the customer relationship. The group has introduced an electronic disbursement of loans for home credit customers and remote lending capability for CEMs.

For the first eleven weeks of 2020, there was no discernible effect of coronavirus on credit quality, credit issued, or collections.Given the uncertainties, the Board has decided that the 2019 final dividend per share of 16 pence will no longer be recommended at the Annual General Meeting (AGM). The capital and the cash impact of the decision to withdraw the dividend is around £40 million.

Financial Performance for the Year Ended 31^st December 2019

(Source: Annual Report, Company Website)

Group adjusted profit before tax for the financial year 2019 surged by 1.6% to £162.6 million(2018 (restated): £160.1 million), as the business successfully defended the hostile NSF bid and persisted to adapt to the evolving regulatory environment. In the financial year 2019, the cost-income ratio was 42.8%, and return on assets stood at 7.9%. The return on equity for the financial year 2019 decreased to 18.2% as compared with the previous year (2018: 19.1%).

Share Price Performance

Daily Chart as on 2nd April 2020, after the market closed (Source: Thomson Reuters)

On 2nd April 2020, Provident Financial PLC’s share closed at GBX 172, a decrease of 7.08 per cent, as compared to the previous day’s closing price. Stock's 52 weeks High and Low are GBX 561.80/GBX 126.87.

Valuation Methodology

Conclusion
Despite continuing regulatory headwinds, the company had a decent performance in 2019. The priority for 2020 will be on enhancing the initiatives planned for CMD segment, rolling out Provident Direct, delivering capital and funding opportunities, developing Vanquis Bank loans, and continuing to enhance the cost efficiency through digitisation. The company’s segments can be affected negatively due to economic and geopolitical risk uncertainties. The group faces a risk of fines and investigations which can impact the future growth as it operates in an industry which is subject to the adverse regulatory headwinds, breaches of which can be potentially fatal for the group. Presently, the global market is facing the biggest slowdown in productivity due to COVID-19. Failing to meet regulatory requirements or expectations and/or deliver poor customer outcomes leading to potential customer detriment.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 172.00 (as on 2^nd April 2020), while we look for any upcoming catalysts in the near term.
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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