Barclays (LSE: BARC) is one of the UK’s most respected banking giants while OneSavings Bank (LSE: OSB) is a relatively unknown upstart in the banking sector.
Nonetheless, to me Barclays has proven time and again during the past five years that the bank cannot be trusted, and the group seems to lack a coherent growth strategy.
On the other hand, OneSavings has made an enormous impact on the British banking industry in a very short space of time, and the young company is outperforming Barclays on many metrics.
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A compelling argument
Comparing several key ratios of the two banks presents a compelling case for investment.
For example, OneSavings’ November trading update reported that the bank is on track to report a full-year net interest margin (the difference between the interest income generated by banks and the amount of interest paid out) slightly ahead of the 3.05% delivered in the first half of 2015. Barclays’ net interest margin for the first nine months of 2015 was 2.99% at its personal and corporate banking division. Barclays’ margin was unchanged year-on-year.
Elsewhere, OneSavings expects to report a full-year cost income ratio of around 26%, less than half of Barclays’ reported cost income ratio of 65% for the first nine months of the year.
Also, OneSavings is growing much faster than its larger peer. During the first nine months of 2015, OneSavings’ loan book rose £986m to £4.9bn and management expect full-year loan book growth to exceed 30%. During the same period the Barclays group loan book only expanded by 1%.
OneSavings’ outperformance on all three of the key metrics above means that the bank is much more nimble and profitable than its larger, lumbering peer.
Last year, Barclays’ return on equity — a key measure of bank profitability — was reported as 9.2%. The bank’s global footprint and complex business, which has become bogged down in regulation held down returns.
However, OneSavings reported an ROE of 31% for the same period.
Undervalued
Fortunately, OneSavings’ strong operating performance seems to have gone unnoticed by the wider market. Despite the bank’s rapid growth, its shares are still trading at a relatively low earnings multiple.
At present, OneSavings’ shares are trading at a forward P/E of 11.7 even though City analysts estimate that the bank’s earnings per share are on track to expand 40% this year. Further earnings per share growth of 10% is expected next year. If the bank meets these forecasts, it will have tripled earnings per share in a period of just four years.
On the other hand, even if Barclays meets City expectations for growth this year, the bank’s earnings will have fallen by a fifth since 2010. City analysts are currently expecting the troubled bank to reported earnings per share of 22.3p for full-year 2015. Based on these figures Barclays is trading at a forward P/E of 10.2. The bank’s shares currently support a dividend yield of 2.9%.
