OneSavings Bank (LSE: OSB) has released an upbeat update that shows it making encouraging progress. Its underlying loan book grew by 13% in the first nine months of the year, which shows that it continues to perform well despite uncertainty surrounding Brexit. However, does this mean that it offers a better risk/reward ratio than internationally diversified banking peer Santander (LSE: BNC)?
OneSavings Bank’s performance in the third quarter of the year was in line with management expectations. As mentioned, lending increased at a double-digit rate in the first nine months of the year and net loans and advances increased by £466m to £5.6bn during the period. Margins on £510m of organic origination in the third quarter remained strong, while OneSavings Bank’s net interest margin to the end of the third quarter continued to be in line with expectations.
In terms of its financial position, OneSavings Bank continues to be supported by a strong capital position. Application levels for the second half of the year to date are significantly in excess of the first half, while OneSavings Bank’s pipeline of new business is at a record level. This shows that even though there has been increased uncertainty since the EU referendum, consumer confidence doesn’t appear to have taken a hit.
However, in the coming months that could all change. The government is due to invoke Article 50 of the Lisbon Treaty by the end of March and this will set in motion a two-year negotiation period on the terms of Brexit. With the Bank of England warning that GDP growth could flatline and unemployment may rise, the outlook for consumer confidence in the UK is somewhat downbeat. Therefore, it could be prudent for investors to seek out geographical diversity ahead of what could prove to be a difficult couple of years for the UK.
A better buy?
One bank that has international diversification is Santander (LSE: BNC). The UK is a key market for the bank, but it also counts other regions of the world as important growth centres. This reduces its risk profile versus OneSavings Bank.
Santander is forecast to record a fall in its earnings in the current year of 8%, but then recover somewhat next year with growth of 7%. This means that its near-term performance could be somewhat volatile – especially since Brazil is a key market and its outlook is also highly uncertain.
This outlook contrasts with that of OneSavings Bank, which is forecast to record a rise in its bottom line of 14% this year and 2% next year. Furthermore, OneSavings Bank has a wider margin of safety than Santander. For example, OneSavings Bank has a price-to-earnings (P/E) ratio of 7.2 versus 10.4 for Santander. While both ratings are very appealing, OneSavings Bank has greater upward rerating potential.
Certainly, Santander’s international exposure means it’s less risky than OneSavings Bank. But the latter’s lower valuation and more upbeat near-term outlook mean that it has the superior risk/reward ratio at the present time.