Small is beautiful they say. Investors in FTSE 250 stock OneSavings Bank (LSE: OSB) certainly think so, with the stock leaping 18% yesterday, and another 6% this morning. By comparison, Barclays (LSE: BARC) looks big, bad and ugly. Looks aren’t everything, however, so which bank makes the better investment today?

Eight in one

Challenger bank OneSavings is a specialist lender offering residential, buy-to-let and commercial mortgages, secured loans and development finance. It is actually made up of eight different brands, 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 toxic legacy issues dogging Barclays, et al. OneSaving’s preliminary 2015 results show a whopping 52% rise in underlying profit before taxation to £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 leapt 43%. Barclays can never produce figures like these. 

Good as Golding

Chief executive Andy Golding said the bank also strengthened its capital ratio, and boosted both its net interest margin and cost-to-income ratio. It is a pleasant change to write about a clean and transparent bank, after years are squinting at the big banks’ murky balance sheets, but it’s also shocking to see how tiny OneSavings really is. Its £758m market cap is dwarfed by Barclays’ £27.4 bn cap — that’s roughly 36 times bigger.

Small may be beautiful but it can also be volatile. Despite this week’s growth, OneSavings trades at 311p which is well below its year high of 412p. My big concern is what happens to buy-to-let from April, when Chancellor George Osborne’s new 3% surcharge on second property purchases kicks in. The deadline has sparked a buying frenzy today but OneSavings is rightly positioning itself for tougher times ahead.

Last year buy-to-let accounted for 15% of new mortgage lending but the Chancellor’s tax crackdown, which also sees higher rate tax relief on mortgage interest phased out from April next year, could put paid to that. It would only take a small rise in interest rates to turn many landlords’ buy-to-let profits 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 incredible £50bn of non-core assets as the road to recovery only seems to get longer and windier eight years after the financial crisis. It recently announced plans to dispose of its African operations, but dispensing with its underperforming investment bank is proving a psychological step too far for a bank that once dreamed being a Master of the Universe.

I have warned of volatility at OneSavings, but Barclays’ vastly greater size has clearly been no defence against share price turbulence, and it will also suffer if the 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 lurking below 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.