Small is beautiful they say. Investors in FTSE 250 stockOneSavings Bank (LSE: OSB) certainly think so, with the stock leaping18% yesterday, and another 6% this morning. By comparison,Barclays (LSE: BARC) looksbig, bad and ugly. Looks arent everything, however, so whichbank makes the better investment today?
Eight inone
Challenger bank OneSavingsis aspecialist lenderofferingresidential, buy-to-let and commercial mortgages, secured loans and development finance. It is actually made up of eight differentbrands, including Kent Reliance, InterBay Commercial, Prestige Finance and Heritable Development Finance.
The beauty of being small is that you have plenty of room to grow plus you avoid the toxiclegacy issues dogging Barclays, et al. OneSavings preliminary 2015 results show a whopping 52% rise in underlying profit before taxationto 105.9m, up from 69.7m in 2014.Loans and advances grew 31% to 5.1bn, helped by organic growth and a second charge mortgage portfolio acquisition, while earnings per share leapt43%. Barclays can neverproduce figures like these.
Good as Golding
Chief executive Andy Golding said the bank also strengthened its capital ratio, andboosted both itsnet interest margin and cost-to-income ratio. Itis a pleasant change to write about a clean and transparentbank, after years are squintingat the big banks murky balance sheets, but its also shocking to see how tinyOneSavings really is. Its 758m market cap is dwarfed by Barclays 27.4 bn cap thats roughly 36 times bigger.
Small may be beautiful but it can also be volatile. Despite this weeks growth, OneSavings trades at 311p which is well below its year high of 412p. My bigconcern is what happens to buy-to-let from April, whenChancellor George Osbornes new 3% surcharge on second property purchases kicks in.The deadlinehas sparked a buying frenzy today but OneSavings is rightly positioning itself for tougher times ahead.
Last year buy-to-let accounted for 15% of newmortgagelending but the Chancellors tax crackdown, which also seeshigher rate tax relief on mortgage interest phased out from April next year, couldput paid to that. It would only take a small rise in interest rates to turnmany landlords buy-to-letprofits into losses. OneSavings has its charms, trading at 8.66 times earnings and yielding 2.97%, but also carries risks.
Bad as Barclays
Barclays has fallen a down-and-dirty 38% over the past year and, in contrast to OneSavings, is looking to shrink its operations to offer investors a tidier proposition. It still has to offload an incredible50bn of non-core assets as the road to recoveryonly seems to get longer and windier eight years after the financial crisis. It recently announced plans to dispose ofits African operations, but dispensing with its underperforming investment bank isproving a psychological step too far for a bank that once dreamedbeing a Master of the Universe.
I have warnedof volatility at OneSavings, but Barclays vastly greater size has clearly been no defence against share priceturbulence, and it will also suffer ifthe economic storm clouds burst. Trading at 9.67 times earnings and yielding 3.98%, some of the problems are in the price, but others may be lurkingbelow the surface. The challenging question is: do you want to invest in the past or the future?
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
