Should You Dump Lloyds Banking Group PLC For OneSavings Bank PLC?

OneSavings Bank PLC (LON:OSB) is small, but is it a better investment than Lloyds Banking Group PLC (LON:LLOY)?

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OneSavings Bank (LSE: OSB) is one of the UK’s first challenger banks. Now the bank is expanding, trying to disrupt the UK’s banking industry, which is dominated by several undisputed banking heavyweights, including Lloyds (LSE: LLOY) (NYSE: LGY.US).

OneSavings began its life back during 2010, after the struggling Kent Reliance building society was rescued with a £50m capital injection by private equity firm JC Flowers. The bank is now focused on residential mortgages, as well as buy-to-let and SME lending to around 150,000 customers. 

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And the most attractive thing about OneSavings’ model is that it’s simple. Most of the bank’s lending comes through specialist intermediaries and is predominantly funded by retail savings. There are no complex derivative transactions, investment banking, or subprime mortgages to worry about.

Still, with a balance sheet of £3bn, OneSavings is tiny compared to high-street behemoth Lloyds. But it is possible that OneSavings could be a better investment than Lloyds? After all, simplicity is often the best option. 

Key metricsLloyds

So, how does OneSavings compare to Lloyds based on key banking industry metrics? For this comparison I will be using OneSavings’ full-year 2013 figures, as these are the bank’s most recently available numbers.  

OneSavings reported a 2013 pre-tax profit of £31.4m, up almost 400% from the year before, Lloyds’ first quarter profit hit £1.8bn, up 22% year on year. So Lloyds wins on size but OneSavings is growing faster.

Lloyds’ net interest margin hit 2.3% during the first quarter and is expected to hit 2.4% during 2014, One’s net interest margin for 2013 was a lowly 2.1%.

Still, OneSavings is exhibiting a much greater control over costs than Lloyds. While Lloyds reported a cost income ratio of 51% during the first quarter of this year, One’s cost income ratio for 2013 came in at only 38%. 

And lastly, return on equity, a key measure of bank profitability and efficiency. During 2013 OneSavings’ return on equity hit 22%, up around 100% year on year. Lloyds’ return on equity for the period came in at a lowly 13%, up less than 10% on the year. 

Foolish summary

Overall the figures above show some interesting trends. Lloyds is obviously the bigger, more profitable bank, however, OneSavings is more efficient. Indeed, One’s return on equity and cost income ratio figures show us that the bank is generating more income that Lloyds on a pound for pound basis. 

What’s more, it can’t be forgotten that Lloyds is still suffering from the financial crisis and the bank could find itself lumped with additional miss-selling costs. OneSavings does not have similar skeletons in its closet.

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