Have I just found my new favourite FTSE 250 share in specialist mortgage lender OSB Group (LSE: OSB)? It certainly looks like it.

OSB takes retail deposits through savings franchises Kent Reliance and Charter Savings Bank, and lends them to specialist sectors of the mortgage market such as buy-to-let, the self-employed, adverse credit, and commercial.

It’s a medium-sized business with a market cap of £1.47bn, but has flown under my radar until now. The shares are actually up 20% in the last year. In the last month, they’ve crashed 20%.

My ears always prick up when a good stock tanks. However, recent experience has told me to tread carefully around volatile shares. In the last year, I’ve bought Diageo, JD Sports Fashion, and Burberry Group after profit warnings. Unfortunately, only JD Sports Fashion has proven a success so far. Burberry is down a painful 40%.

Is OBS Group a bargain buy?

The OBS crash was triggered by a poorly received set of half-year results on 15 August, yet there were positives in there, too. Underlying profit before tax more than doubled to £249.9m, while statutory profit tripled from £76.7m to £241.3m.

However, on closer inspection those numbers were a little misleading, as OSB suffered one-off adverse movements in the prior year.

There was another issue. The board had forecast full-year net interest margins of 250 basis points, but cut them to between 230 and 240, amid increased mortgage market competition. It’s not a huge cut, but that’s a key metric.

Underlying return on equity climbed to 18% but net loan book growth was modest at 1.5%, “slightly lower than originally guided as we prioritised returns over growth”, according to CEO Andy Golding.

High income, low valuation

Personally, I’m concerned about the outlook for the buy-to-let market, where OSB is a leading light, writing 9% of all new mortgages. Labour’s forthcoming Renters’ Rights bill is spooking landlords and many are selling up, while new entrants may be deterred.

Golding says OBS faces “increased competition in the subdued mortgage market”, which doesn’t augur well either. So I can see why investors are concerned.

Its balance sheet remains solid with a common equity tier 1 capital ratio of 16.2%, up slightly from 16.1% at the end of last year. That includes the impact of a £50m share buyback, announced in March, mostly completed by mid-August.

The shares look staggeringly cheap trading at just 5.13 times earnings. And the trailing yield of 8.29% is a stonker. Especially since the board hiked first-half dividends 5% to 10.7p per share, in line with its policy. It also approved a new £50m share buyback, which began on 6 September.

There are more risks than I hoped but given the low valuation and mighty yield, I can live with that. I’m worried that upcoming interest rate cuts could squeeze margins further, but with underlying net loan book growth forecast to hit 3% for 2024, I’m planning to buy it anyway. It seems too good to miss today.