Questor: no divi yet from OneSavings Bank – but it could return in six months’ time. Hold

Who on earth would want to be a bank right now? The Western world is already heavily indebted. Regulation is tight. The economic fallout from the pandemic raises the prospect of bad loans and lower earnings.

To cap it all, central banks’ policies of low interest rates and quantitative easing are crushing profit margins on loan books. It is an unremittingly grim picture.

And yet banks come with one saving grace: none of this is new and it can therefore be argued that valuations already reflect this treacherous environment, especially after a period of terrible performance.

For the record, the banks sector is the third-worst performer in the FTSE so far this year, after a 47pc fall; only oil and gas producers, and automobiles and parts, trail behind. OneSavings Bank, first assessed by this column at 341p in November 2018, therefore represents a bit of a conundrum.

We have made a small paper loss (albeit one ameliorated by dividends received) on a stock that lies in a sector beset by bad news.

Yet its £1.3bn market value represents a discount to net asset value of £1.6bn, so the shares are already cheap and sentiment depressed amid concerns over what will happen to the housing market once the furlough scheme begins to unwind. OneSavings Bank, in the eyes of some, effectively doubled down on the buy-to-let mortgage market when it merged with Charter Court Financial Services last year.

Better still, last month’s interim results were better than analysts had predicted, not least because the bar for expectations had been set low thanks to the prevailing gloom. Granted, net interest margins fell and the underlying loan loss ratio rose to 0.6pc from 0.1pc.

But the loan book grew by 2pc and costs were reined in with the result that underlying pre-tax profits fell by just 14pc, no mean achievement against this economic backdrop.

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OneSavings also remains extremely well capitalised, with a “common equity tier one” ratio of 17.4pc. That should allow the bank to withstand any buffeting it gets from the housing market, where the latest data on mortgage applications and price rises offer grounds for encouragement anyway, rather than the opposite.

Just like 2019’s final dividend, this year’s interim was passed, but management will take a fresh look alongside the full-year results. Analysts are pencilling in a divi of 8.33p a share and that could be one catalyst to persuade investors to revisit the stock.

Further positive signs from the economy and housing market would help too – although the opposite also holds true – so the combination of OneSavings’ lowly valuation and well-buttressed balance sheet means we shall remain loyal for now.

Value stocks such as this remain resolutely out of favour, as technology and growth names continue to run riot, but we shall stay patient. 

Questor says: hold

Ticker: OSB

Share price at close: 297p

Update: AG Barr

Relegation from the FTSE 250 to the FTSE Small Cap index makes not a jot of difference to the day-to-day operations of soft drinks maker AG Barr, but it does unfortunately reflect investors’ lack of interest in the Scottish firm right now and this column’s positive view continues to fall flat – we are now sat on a paper loss of some 37pc.

However, the last trading update in late July offered enough to keep us interested for now.

It was no surprise to learn that lockdown had been bad for business at the maker of the Irn-Bru, Rubicon and Funkin drinks ranges. But first-half sales fell by just 8pc year-on-year as take-home purchases from major retailers held up well, even as sales in pubs, bars and restaurants understandably collapsed.

Moreover, there are tentative signs of a pickup in demand as Britain slowly emerges from spring’s nationwide lockdown and, perhaps most reassuringly of all, AG Barr continues to generate positive cash flow.

That further bolsters a balance sheet that had only a tiny net debt position even when £7.9m of leases and a £10.5m pension liability were taken into account.

This is another one where patience will be required while the balance sheet provides protection against further falls.

Questor says: hold

Ticker: BAG

Share price at close: 388p

Russ Mould is investment director at AJ Bell, the stockbroker

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