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(Sharecast News) - OSB Group tanked on Friday after it warned of an adverse effective interest rate (EIR) adjustment of around £160m to £180m in the first half of 2023 on an underlying basis.
It said this was due to a reduction in the expected time spent on the reversion rate by Precise Mortgages customers.
OSB said: "As the first half of 2023 progressed, the group observed a step change in the behaviour of Precise Mortgages owner-occupied and Buy-to-Let customers reaching the end of their initial fixed term.
"As interest rates have continued to rise, leading to further increases in the Bank Base Rate (BBR) linked reversion rate, and as the group continued to develop its Precise retention programme, customers are choosing to refinance earlier and spend less time on the higher reversion rate than expected, compared to previously observed behavioural trends."
OSB said "significant judgement" is required in estimating how long customers will spend on the higher reversion rate in the future.
"The group has reviewed customer behaviour in the first half of the year and has revised the expected future behaviour of Precise Mortgages customers once they reach the end of their initial fixed rate period.
"Consequently, the group anticipates that Precise Mortgages customers will now spend an average of five months on the reversion rate and the reduction in the reversion period will lead to an estimated adverse EIR adjustment of £160m to £180m on an underlying basis in the first half of 2023."
OSB also said in the statement late on Thursday that it is on track for underlying net loan book growth of around 7% for FY23 and that administrative expenses in the first half are slightly below expectations.
At 0905 BST, the shares were down 20% at 378.00p.
Canaccord Genuity said: "We estimate this will result in an approximately 30% hit to consensus profit before tax in FY23 and circa 8% hit to NAV."
It moved its recommendation and target price on the shares to 'under review' from 'buy' and 635p, while it revisits its assumptions "in light of such a significant change in guidance".
Numis said in a note: "Naturally people will ask whether other lenders are exposed. As a reminder, an EIR asset is a block of accrued income that has yet to be earned. For mortgages, it arises from the assumption that customers will stay on higher margin reversionary rates post the initial fixed or discounted variable rate, for a (normally short) period of time.
"At the moment though, customers are refinancing more quickly than some had assumed, a function of the very high reversionary rate on most mortgage loans. Those lenders must then write off income already booked in respect of the reversionary rate related income that will never emerge. Thankfully, we do not think the big UK banks are materially exposed."
