HSBCsfull-year 2014 results really showed how big banks are struggling in todays business climate.Risingregulatory costs andfines are really starting to hurt global banking giants like HSBC.
Whats more, consumers are increasingly turning their backs on big banks favouring smaller, challenger banks instead.
All five of these banks are reporting rapid growth and look to be better investments than their larger peers.
Arbuthnot Banking is a holding company for Secure Trust Bank and the Arbuthnot Latham private bank.
Secure Trust is a pure retail banking play and consumer seem to be attracted to the banks offering lending volumes expanded 75% during 2014.
On Black Friday the bank saw a 1300% in retail finance applications and 600% increase in new business written compared to the year-ago period.
And thanks to these impressive rates of growth theCity expects Secure Trusts pre-tax profit to expand 61% over the next two years. At present the bank is trading at a forward P/E of 16.4, based on predicted 2015 earnings.
As mentioned above, Secure Trust is part of the Arbuthnot banking group. As well as Secure Trust, Arbuthnot operates a private bank, which when combined with Secure Trust becomes a formidable force in the banking industry.The groupspre-tax profit for the first half of 2014 jumped 368%. Profits at the private bank rose 70%.
If youre looking to invest in Secure Trust but dont want to pay a high price, Arbuthnot could be a better bet. The group is currently trading at a forward P/E of 15.7 for 2015, falling to 12.5 for 2016. EPS growth of around 30% per annum is expected for the next two years.
Like the Arbuthnot group, Virgin Money is also growing rapidly. According to City figures, the banks shares are currently priced at a level that offers growth at a reasonable price.
Indeed, the City expects the company to report EPS of 21.9p for 2015, which implies that Virgin Money is currently trading at a forward P/E of 14.4. Additionally, City analysts expect the banks EPS to jump by 52% during 2016.
On that basis, the shares are currently trading at a PEG ratio of 0.2 showing that Virgin Money is severely undervalued based on its projected growth.
Unfortunately, while TSBs smaller peers are charging ahead, TSB is struggling.
As it completes the separation from parentLloyds, TSBs costs are rising and as a result, the banks EPS are set to fall 44% during 2015. However, TSB is expected to return to growth during 2016, when analysts expect the company to report EPS growth of 50%.
Nevertheless, considering the fact that TSBs EPS are set to slide this year, the banks valuation of 20.2 times forward earnings seems excessive.
OneSavings Bank is by far the cheapest play on the challenger bank sector.
And with a return on equity of 30% reported for the first half of 2014, its difficult to see why. Underlying profit before tax jumped by 400% year on year for thesix months ended 30 June 2014. These figures show that OneSavings is certainly one of the banking sectors better picks.
According to current figures, OneSavings is currently trading at a forward P/E of 9.2. Analysts expect the banks EPS to expand 14% during 2016 and on this basis the bank is currently trading at a 2016P/E of 8.1. OneSavings is expected to offer a dividend of 6.3p per share to investors this year a yield of 2.8% at current levels.
Anyone of these challenger banks could be suitable for a growth investor’s portfolio. But only you can decide which one is the best pick for your personal portfolio.
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