Todays full-year results from Virgin Money (LON: VM) are being well received by the market, with the shares up more than 6% as I write.
Great growth in earnings
Underlying pre-tax profit is up 53% since last year, and the firm reports an array of other positive financial outcomes.
Virgin Moneys chief executive says,
We have performed strongly against our objectives, includingdelivering market-beating growth in our coremortgages, savings and credit card businesses, maintaining the quality of our balance sheet and delivering a customer satisfaction rating among the highest scoring retail banks in the UK.
Virgin Moneys business is flying, which is a great result for the UK government. Britain regulates its banks through the Bank of Englands Prudential Regulation Authority (PRA) and one of the PRAs objectives is to facilitate effective competition in Britains banking market. So, seeing a challenger bank such as Virgin Money growing like mad will delight regulators and politicians, who seem set on seeing power wrested from the clutches of Britains big banks, such as HSBC (LSE: HSBA) and others.
City analysts following Virgin Money expect earnings to shoot up by 33% during 2016 and by 30% in 2017. Thats a cracking rate of growth, which demonstrates the firm is doing a lot right.
A modest valuation?
At todays 361p share price, the firms forward price-to-earnings (P/E) rating runs at just over 11 for 2016, which seems modest for such growth. Perhaps thats because the recent general market weakness seems to have pulled the share price down. In 2015, the shares traded as high as 450p.
Virgin Moneys growth forecasts contrast with those of HSBC. City analysts see the troubled banking giant achieving a 4% uplift in earnings during 2016 and 9% in 2017.
In February, HSBCs chief executive said, The current economic environment is uncertain, but our diversified banking model, low earnings volatility and strong capital generation give us strength and resilience that will stand us in good stead.
At todays 471p share price, the firm trades on a forward P/E rating of just below 10 for 2016, which is just a smidgeon below fast-growing Virgin Moneys. Although sporting a large market capitalisation, HSBC seems to be a business aiming to recover from recent challenges, whereas Virgin Money looks like a growth proposition. The valuations seem close, and that makes Virgin Money seem all the more attractive.
HSBCs forward dividend yield sits at around 7.6%, with the payout covered about 1.35 times by earnings. At Virgin Money, the yield is just over 1.7% for 2016, and earnings cover the payout more than five times. Such robust cover from earnings reinforces my view that the directors think there is plenty of growth potential left in the business.
Id rather invest in Virgin Money than HSBC and believe there is a good chance that the firm could trounce total returns available from its larger rival.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended HSBC. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.