On Final Results, Are Arbuthnot Banking Group Plc & OneSavings Bank PLC Now Better Buys Than Banco Santander SA?

Should you ditch Banco Santander SA (LON: BNC) and buy Arbuthnot Banking Group Plc (LON: ARBB) and OneSavings Bank PLC (LON: OSB)?

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Shares in OneSavings Bank (LSE: OSB) have soared by 12% today after it released an upbeat set of results for 2015. Pre-tax profit rose to over £105m from £64m in the previous year as loans and advances for the challenger bank increased by 31%. This was driven by gross organic loan origination of £1.8bn (versus £1.5bn last year) and the purchase of a second charge mortgage portfolio for £260m.

In addition, OneSavings Bank’s cost-to-income ratio fell from 28% to 26% which, when compared to the more established banks, provides an indication of just how efficient OneSavings Bank is. And with it having a common equity tier 1 (CET1) capital ratio of 11.6%, which is 20 basis points higher than last year, it appears to be financially sound, too.

With OneSavings Bank forecast to increase its bottom line by a further 10% this year and by 13% next year, it continues to offer superb growth prospects. And with its shares trading on a price-to-earnings (P/E) ratio of just 7.6, fears surrounding a possible Brexit and a potential slowdown in the UK economy appear to be more than adequately priced in.

Record profits

Also reporting today was Arbuthnot Banking Group (LSE: ARBB). Its shares have also risen today after it announced a record pre-tax profit of £34m for the 2015 financial year, which represents a rise of 52% versus the prior year. The company will pay a special dividend of 25p per share on the completion of the sale of Everyday Loans as it seeks to strengthen its asset base so as to support future growth.

With Arbuthnot increasing customer lending to above £1.5bn for the first time ever, it appears to be benefitting from favourable trading conditions. This looks set to continue, with the company’s bottom line forecast to rise by 42% in the current year. This puts Arbuthnot on a PEG ratio of just 0.2, which indicates that its shares could continue their rise following the 211% gains of the last five years. And with net assets per share standing at 1,253p, Arbuthnot’s price-to-book (P/B) ratio of 1.06 indicates excellent value for money.

Lagging behind

While Arbuthnot and OneSavings Bank are performing well and delivering superb profit growth, Santander (LSE: BNC) continues to struggle. Its earnings are expected to fall by 1% in the current year as disappointing performance in the Brazilian economy continues to weigh heavily on the bank’s outlook. As such, its share price could come under a degree of pressure in the coming months.

However, Santander is expected to bounce back with growth of 9% in 2017. And while its PEG ratio of 1.1 may be higher than the PEG ratios of Arbuthnot and OneSavings Bank, it still indicates that Santander offers excellent long-term capital gain prospects. Furthermore, Santander is also a more diversified and better yielding bank, with it having a yield of 4.5% versus 2.2% for Arbuthnot and 3.3% for OneSavings Bank.

As such, a combination of all three banks seems to be a prudent move, since Arbuthnot and OneSavings offer greater potential rewards than Santander but are arguably riskier as a result of their lack of geographical diversification and lower yields. However, if an investor can’t buy all three then it could prove difficult to miss out on the growth prospects of Arbuthnot and OneSavings Bank in favour of struggling Santander.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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