There’s no denying the fact that Virgin Money (LSE: VM) and Barclays (LSE: BARC) are two very different banks.
On the one hand, Barclays is one of the most recognisable brands in the British banking industry, with a global presence and more than £1trn of assets. While on the other, Virgin Money is an upstart, with less than 100 branches and a limited product offering.
That said, Virgin’s size doesn’t appear to be holding the company back. Customers are flocking to the bank’s offering. For example, for the six months to 30 June 2015 Virgin’s underlying pre-tax profit jumped 37% year-on-year to £81.8m.
But this kind of growth doesn’t come cheap. Virgin currently trades at a forward P/E of 16.5, a premium valuation that may put some investors off. What’s more, the bank’s prospective dividend yield of 1.0% is nothing to get excited about.
However, Barclays’ shares currently trade at a forward P/E of 11 and support a dividend yield of 2.6%. So, Barclays offers income and value while Virgin offers growth, which makes the two banks the perfect partnership for your portfolio.
A mix of growth and value
Barclays is in the middle of a drastic restructuring. The bank fired its previous chief executive Antony Jenkins, after only three years at the helm, during July and brought in turnaround expert John McFarlane on an interim basis to “accelerate the pace of execution”. At the time, this move shocked the market but it wasn’t wholly unexpected.
Indeed, Barclays has been struggling to turn around its struggling international business and investment banking division for years now, and progress has been slow. The bank’s earnings per share have fallen by 20% over the past five years. Barclays’ shares have underperformed the wider FTSE 100 by 30% over the same period.
Still, for value hunters Barclays’ shares present a lucrative opportunity. For example, the bank’s core business is growing steadily and reported a return on equity — a key measure profitability — of 11.9% for full-year 2014.
However, Barclays’ non-core operations are holding the bank back. The group’s investment bank reported a return on equity of only 2.9% last year and Barclays’ “bad bank”, which is the equivalent of a financial dustbin, is still racking up multi-million pound losses every year.
Barclays is in the process of winding down its bad bank, but the process is taking time. With a new CEO, it is believed that the process of selling off toxic assets will be accelerated. So, investors who are prepared to wait should be able to reap the rewards as Barclays returns to health. And as Barclays cleans up its act, Virgin will take up the slack.
City analysts expect Barclays’ earnings per share to jump around 30% this year and a further 22% during 2016.
