3 Metrics That Make OneSavings Bank plc A Better Buy Than Lloyds Banking Group plc And Virgin Money Holdings (UK) plc

A look at why OneSavings Bank plc (LON:OSB) is a better buy than Lloyds Banking Group plc (LON:LLOY) and Virgin Money Holdings (UK) plc (LON:VM).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Small challenger banks are delivering superior returns and have better cost efficiency than many of their bigger rivals. We will take a look at OneSavings Bank (LSE: OSB), a challenger bank which has a strong focus on mortgage lending, and see how its financial performance compares to Lloyds Banking Group (LSE: LLOY) and Virgin Money (LSE: VM).

Return on equity

The return on equity (ROE) is a measure of the amount of profit generated for every £1 of equity invested. This makes it an important measure of a bank’s performance because the ROE for banks is often seen as a competitive advantage by investors.

  Return on equity (%)
OneSavings Bank 31
Lloyds 3.7
Virgin Money 6.7

A bank’s ROE needs to be in excess of its cost of equity in order for the bank to deliver value to shareholders. Therefore, it is better for a bank to have a higher ROE and this usually means the banks with higher ROEs trade with higher price to book ratios.

Should you invest £1,000 in Frasers Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Frasers Group Plc made the list?

See the 6 stocks

In the first half of 2015, the ROE for OneSavings Bank is far higher than that of Lloyds Banking Group and Virgin Money. We should note that Lloyds’s underlying ROE was 16.2%, if one-off legacy costs, including a £1.4 billion PPI provision charge and £660 million charge relating to the disposal of TSB, were excluded. But that still leaves OneSavings Bank’s ROE almost twice as high as Lloyds’s.

Cost to income ratio

The cost to income ratio is an important financial metric for banks because it, too, is seen as a measure of a bank’s competitive advantage. Banks with lower cost to income ratios are generally considered to be safer and stronger banks as their greater profit margins means they can absorb shocks more easily.

  Cost to income ratio (%)
OneSavings Bank 26
Lloyds 48.3
Virgin Money 62.2

Here, OneSavings Bank has much lower operating costs relative to the banking revenues it earns from extending loans and earning fees. Although Virgin should be able to benefit from more economies of scale than OneSavings Bank, it suffers from a high cost structure and a less profitable mortgage book.

Net interest margins

Net interest margin is a measure of the spread in the average interest rate it earns from extending loans and the interest cost of its funds. It is, therefore, a measure of the profitability of the bank’s lending activities.

  Net interest margins (%)
OneSavings Bank 3.05
Lloyds 2.62
Virgin Money 1.65

Low net interest margins is partly the cause of the higher cost efficiency ratios suffered by Virgin Money. On net interest margins, Lloyds does not do too badly, but OneSavings Bank is still more profitable on this metric. With one of the largest branch networks and the most retail customers, Lloyds has been able to reduce the interest it offers to depositors and offer loans on attractive terms.

Conclusion

It’s interesting to see that Virgin Money, a mid-sized challenger bank, is not doing as well as Lloyds Banking Group.  Unlike the other ‘big four’ banks, Lloyds has refrained from international expansion and this has enabled it to gain more of the cost savings from local economies of scale. So, although it is not nearly as profitable as the smaller challenger banks, it is probably the most profitable of the larger banks.

OneSavings Bank comes out top with all three financial metrics, and it also seems to offer the strongest growth prospects. As OneSavings Bank grows, its cost efficiency could benefit further from economies of scale and its return on equity would likely improve with increasing leverage.

There are near-term headwinds affecting OneSavings though. The proposed introduction of an 8% Bank Corporation Tax Surcharge would eat into the earnings of smaller banks, reducing the amount of capital available to support further growth. Furthermore, competition has been intensifying in the mortgage lending sector, particularly in the SME and buy-to-let mortgage market that OneSavings Bank focuses on.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the S&P 500 be heading for an almighty crash?

Christopher Ruane shares his take on why he thinks the S&P 500 could be heading for a big fall at…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

Down 64%, this FTSE 250 stock offers a 13% dividend yield for investors

This struggling investment banker has suffered significant losses in the past five years, but it has the second-highest yield on…

Read more »

Investing Articles

1 stock market ETF I’ve been buying during the sell-off

The stock market's been all over the place in April, creating a fertile breeding ground for long-term buying opportunities.

Read more »

Investing Articles

As the Sainsbury share price bucks the price-war trend on FY results, I examine the dividend prospects

The J Sainsbury share price has been regaining ground, despite growing fears of intense competition in the supermarket sector.

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Investing Articles

Should I invest in a Stocks and Shares ISA or a SIPP to retire early?

Early retirement is the ultimate goal for many investors, but choosing between a Stocks and Shares ISA and a pension…

Read more »

Investing Articles

Is now a great time to consider buying Greggs shares?

Greggs shares have been hammered in 2025. But have they now fallen too far? Paul Summers takes another look at…

Read more »

Investing Articles

Is it still a great time to buy cheap shares as stock market crash fears recede?

Fear of a stock market crash can trigger panic selling... but that surely can't be the best thing to do…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

The Vodafone share price is 24% undervalued, according to analysts

Our writer’s been looking at the latest targets for the Vodafone share price. Although there’s a wide variation, the average…

Read more »