OSB Group Plc (OSB) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's OSB Group 2024 Preliminary Results. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I'll now hand the floor to Andy Golding, Chief Executive, to begin. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining OSB Group's 2024 Preliminary Results Presentation. I'm pleased to present this morning's results to you and excited to regroup at 10:00 a.m. 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. This slide highlights three key themes to 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 the backdrop of a broadly subdued market in volume terms. During the year, some lenders have elected to drop pricing to a level below this 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 and this is reflective of our pricing discipline. Our net interest margin of 230 basis points is inclusive of a further EIR adjustment of GBP 15.9 million reflects the transitionary impact of lower prevailing spreads on mortgages as products written in prior years reached maturity and fixed-term savings recycled on to 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. 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 sales platform for Kent Reliance 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. Finally, delivering attractive ROE and cash returns to shareholders continues to be our primary objective. The underlying GBP 443 million 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 2 GBP 50 million buyback and are confirming today a 5% increase in our full year '24 dividend to 33.6p per share, consistent with our progressive dividend policy. This equates to a total return to shareholders of GBP 226 million in the year, including the buybacks undertaken. I'm also delighted to announce a further share buyback of GBP 100 million over the next 12 months, which will commence tomorrow and further demonstrates the Board's continued commitment to return excess capital to shareholders and efficient capital management. I'll now hand over to Victoria to walk you through the financials in more detail.

Thank you, Andy. Turning first to the P&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 reached maturity and the cost of meeting our MREL requirements. I'll cover these later on the NIM slide. These dynamics were partially offset by the nonrecurrence of the adverse effect of interest rate adjustment recognized in 2023. Fair value losses on the pipeline mortgage swaps reduced in 2024 compared with prior year mainly due to movements in the SONIA forward curve, which will reverse over the life of the swaps. We also incurred a GBP 2.4 million loss on sale from the GBP 1.25 billion December securitization and deconsolidation transaction. I'll cover administrative expenses and impairment later in this presentation. This resulted in a bottom line underlying profit before tax of GBP 443 million, an increase of 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 2 GBP 50 million buybacks announced in 2024. The next slide summarizes our strong, secured balance sheet. Net loan book reduced by 2% in the year to GBP 25.1 billion, reflecting the derecognition of GBP 1.25 billion of Precise Buy-to-Let produced following securitization in December. Adjusting for this transaction, the loan book would have increased by 2.5% supported by GBP 4 billion of originations, which decreased by GBP 700 million from the prior period, reflecting our disciplined approach to new lending. Retail deposits grew by 8% to almost GBP 24 billion as at the 31st of December 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 GBP 1.4 billion at year-end. We have since continued to make further repayments, and as at today, we have just under GBP 800 million remaining and we are comfortable with our plan to repay fully by October 2025. You can see this MREL debt increased by circa GBP 400 million 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 remained strong, whilst the 3-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-Let originations in the year strengthened, reflecting a moderation in mortgage pricing and growth in rental income. 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. As we reached the end of 2024, these acquisition adjustments were fully amortized, and therefore, our results going forward 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 273 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 on to lower prevailing spreads. The lending margin was impacted by GBP 15.9 million EIR adjustment in December, reflecting a 1-month reduction from 5 months to 4 months in the average time that Precise borrowers are assumed to spend on the higher reversion rate before refinancing. Our fixed rate deposit book continued recycling on to tighter spreads and those that prevailed throughout much of 2023 and that were written at a volatile period at the end of 2022. In January, we issued GBP 400 million of MREL qualifying debt securities, which diluted NIM by 8 basis points versus the December exit rate. We are now carrying a total of GBP 950 million of MREL 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 225 basis points as both the lending spreads and net funding impacts on our overall NIM began to stabilize in the second half of 2024. As I look at customer behavior today, we have seen no material change from year-end assumptions and 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 GBP 27 million at the year-end for a 2-month reduction in the weighted average life on reversion. This sensitivity is expected to decrease by a further circa GBP 10 million by the end of 2025. I'm pleased that the potential impact of EIR on 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 2022. We maintained our strong focus on cost discipline and efficiency as we manage the cost base in an inflationary environment whilst investing in transformation. The admin expense of GBP 257 million and a cost-to-income ratio of 37% on an underlying basis came broadly in line with our expectations. The group's core U.K. 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 GBP 4.5 million. As at the 31st of December, the group's number of employees was broadly flat to the prior year. The new Bank of England levy added GBP 3.3 million 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 GBP 9.9 million as the intensity of delivery ramped up. You can see further detail on the right-hand side, and later on this morning we'll talk further about the benefits of the transformation program will bring to our business. The underlying management expense ratio of 85 basis points was 4 basis points higher than in the prior year, but is still very competitive versus peers. Looking forward, we anticipate circa GBP 270 million of admin expenses in 2025. Within this, core costs, which were GBP 238 million 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. 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 H2, particularly in respect of house prices, led to a GBP 36.2 million provision release in the year with a further GBP 7.9 million release -- reduction in post-model adjustments. Changes in arrears led to a charge of GBP 10.8 million, although I note the growth -- the rate of growth slowed significantly in the second half and a further charge of GBP 8.4 million related to changes in the credit profile of borrowers as they transitioned through modeled IFRS 9 impairment stages. Our total coverage ratio has decreased by 6 basis points, but remains more than twice the level it was pre-pandemic at the end of 2019. Or to give another sense of perspective, our ECL balance sheet provision is more than 10x the size of our average write-offs over the last 5 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's CET1 ratio remained strong at 16.3% at the end of December. The waterfall illustrates our strong capital generation from profitability of 2.7%, the 0.5% released 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 3.1, which we now expect to reduce our CET1 ratio by just over 1% if it had been fully implemented on the 31st of December 2024, a smaller impact compared to our previous guidance of just under 2%. 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 GBP 100 million share buyback to commence tomorrow, expected to complete over the next 12 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 3.1 rules. Thank you. I will now pass back to Andy.

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, '25 and '26 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. So during 2025, we'll continue to work towards optimizing the lending book and delivering a diversified portfolio, growing into high-yielding segments. Jon 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 225 basis points, and we anticipate GBP 270 million worth of administrative expenses for the year as we continue to invest in the business. And again, we'll tell you more about our transformation program later on. 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 circa 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. 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 update 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 turn over to Q&A, but I would be grateful if you could limit your questions to 2024 and the near-term guidance. Operator, could we open up for questions, please?

[Operator Instructions] First question on the line is from Benjamin Toms of RBC.

Incredibly difficult to keep them to just the next 2 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. 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 or plateauing in 2026 and then 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? Is it investment in tech capabilities, facilitating volumes? Or is it investment in efficiency allowing you to generate cost saves?

Thanks, Ben. I mean, I'll touch on the NIM point because actually I share your thought process 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 of 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 strong yields that we're putting on at the front end. . But yes, I mean, we all know that as interest rates come off, OSB historically has seen improvement in its NIM as interest rates reduce, and as you say, there are probably potentially a few tailwinds. But we have to guide on what we see today because there's a lot going on in the geopolitical environment and the macro-economy that we're not in control of. So hopefully, that touches on the NIM point. Vic, do you want to talk about the cost?

Yes. So I was going to say, Ben, you will see -- you'll see a lot more on this at 10 a.m. But I would say, yes, our investment spend, I guess, we'll give you all the details about our transformation program. But yes, I would agree with your general sentiment that, yes, we have an increase in that cost through our transition period and then that will taper off and it will drive further efficiency. In terms of where that spend is, yes, it is tech capability. I'd say we are looking to change the way our cost is structured and be more tech-enabled to create operational leverage for the future. But I would say there is an awful lot that you'll find out on that at 10:00 a.m. So we will give you a lot more detail and answer all of those questions and more hopefully in the next session.

The next question is from Grace Dargan at Barclays.

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? Are you talking a couple of bps here and there? Or are we talking more of the range of 220 to 230, 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? And I guess, noting your comments, should we be thinking about just a pay down to 15%, at least until Jan '27?

Okay. So yes, obviously, Grace, 2026 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 bps here and there. I mean, we know we need -- we have one more benchmark MREL issuance before that goes live in 2027. And I would say at the minute, we're assuming that funding remains relatively stable. It has been. So assuming that doesn't change, we are looking at sort of a few bps here and there. As we've sort of mentioned in the 2025 guidance, these factors of lending and funding are starting to stabilize. And as you say, we see that continuing through 2026 as the sort of loan book -- the back book impact is mitigated by the front book growth. So hopefully, 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're really talking modestly similar, but obviously, we will update on that as we get through this year and on the interims and naturally we will -- we're striving to optimize and focus on every basis point. So we're certainly looking to optimize 2026. And then your question on capital, yes, I mean, we are -- it's just over 1%. So yes, we look to keep to a glide path towards that just over 15%. You'll see -- if you look at where we're landing, we've got the GBP 100 million that will come out, we're confident on our ability to keep generating good returns and organic generation of capital. And then we'll assess sort of later in the year and for next year. 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.

Our next question is from Edward Firth, KBW.

I just have two questions actually. The first one is on consensus. I don't really like to ask questions about consensus, but there seems to be some confusion in the market this morning about you're guiding to a downgrade or not for 2025. So I just -- you sent us the numbers, so I might as well just ask you direct. The way I look at it, it costs a little bit higher than consensus, 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. Because it just seems to me if Basel 3 is only going to be 1% now, at 16%, 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 GBP 100 million? Or have you been told that is the least you can do without disturbing the stock price? What -- how do you -- it seems to me there are challenges in getting that capital back. And I just wonder how we should think about that in terms of the maximum you can do, the maximum buyback you can do, et cetera.

Yes. So thanks, Ed. I'll take your question on consensus. So yes, we did publish our company [indiscernible] 2025. When we look at those key metrics, NIM is around 2.24%. So yes, I mean, our guidance is circa 2.25%. So I think we're aligned there. And again, yes, ROE of about 13.5%. So I would say we are broadly aligned to consensus. So I don't think, as you say there's costs, yes, slightly up, but I would say there's no real themes I think that we're widely different from.

And on the capital, I kind of -- I share your curiosity around there. I mean, clearly, we want to get through a glide path to our target post Basel 3.1 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. And GBP 100 million, it's a sizable buyback in terms of the volume of stock that was traded. I'm not saying it's the maximum we could do, but given everything that's going on from a geopolitical perspective, given we have got to put a glide path in place to Basel 3.1, it seems like a sensible level. And of course, market opportunities if they expand, we want to make sure we've got some capital powder dry to be able to take advantage of those opportunities if we see attractive RoTEs to be made in the markets in which we operate. So I think we're doing a good job of returning capital to shareholders. I think the dividend is meaningful. 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.

[Operator Instructions] Okay. We have no further questions on the call.

Okay. In that case, it sounds as everyone is holding their powder dry for post our 10 a.m., which is good because I think we'll 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.

Thank you.