Virgin Money (LSE: VM) and Barclays (LSE: BARC) are two very different banks. Barclays is one of the most recognisable brands of the British banking world, with a global presence and more than £1trn of assets. While Virgin Money is an upstart, with less than 100 branches and a limited product offering.
Nevertheless, Virgin Money has many advantages over its larger peer. For a start the company is growing at an alarming rate as customers flock to the bank.
Rapid growth
Virgin Money has been trying to shake up the UK banking market over the past ten years with a customer-focused approach to banking. And, so far, customer seem to appreciate the bank’s differentiated offering.
During the first half of this year, Virgin’s underlying profit before tax jumped 37%. Growth was driven by a 44% increase in mortgage lending, along with the successful migration of the group’s credit card business in March 2015. The value of retail deposits at the bank increased by 3% during the period to £22.8bn.
Barclays’ growth was more subdued during the first half of 2015. Total income for the group’s personal and corporate banking division grew 1% year-on-year. After deducting costs, profit before tax rose 4%.
But while it’s easy to see from Virgin’s headline figures that the bank is growing faster than Barclays, it is the quality of Virgin’s earnings that’s really impressive.
Indeed, at the group level, Virgin’s return on tangible equity — a key measure of profitability — came in at 10.2% for the first half. Barclays’ RoTE stood at only 9.1% for the period. Moreover, at the end of June Virgin’s core equity tier one capital ratio — financial cushion — was reported as being 18.7%. Barclays on the 0ther hand only reported a tier one capital ratio of 11.1%.
Overall, these figures indicate that Virgin is taking less risk than its larger peer but is also achieving a faster rate of earnings growth and a higher return on equity.
Simplicity
There are many reasons why Virgin is a better bet than Barclays but one of the most important factors is the bank’s simplicity.
You see, the banking sector’s increasing complexity is a key concern for the industry’s analysts. It has now become extremely difficult to understand and interpret the balance sheets of large financial institutions’.
Barclays is no exception.
Barclays’ half-year results release weighed in at a staggering 200 pages. The group has two separate reports, one for Barclays bank, another for the Barclays group, each one is around 100 pages long. Most of the release is devoted to explaining the risks at the group’s investment bank, as well as Barclays’ exposure to exotic financial instruments.
However, Virgin’s half year results release is around 80 pages long, which is hardly bedtime reading but is manageable. What’s more, with Virgin’s condensed report it is easy to dissect results and break down the bank’s exposure to risky credit.
So overall, there are several key reasons why Virgin is a better bet than Barclays.
