2 bargain banking stocks I’d buy with £2,000 today

These bargain challenger banking stocks could offer investors a healthy return.

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Close Brothers Group (LSE: CBG) is one of the UK financial sector’s success stories. The company, which provides traditional banking services such as lending as well as asset management and wealth management services, has grown steadily over the past five years as it capitalises on growth opportunities its larger peers have overlooked, helping net profit grow at a rate of around 14% per annum.

Today the firm announced that it had continued this record of growth with adjusted operating profit rising 6% in its fiscal first half. 

Asset management growth 

What has allowed Close Brothers to outperform its peer group over the past few years is its asset management business.

Asset management tends to have higher margins than traditional banking, which relies on the size of the net interest margin — the difference between what rate the bank can lend at and the rate it pays to depositors — that can vary from year-to-year. As asset management also involves managing client money, rather than lending out funds, it is also more profitable because Close Brothers does not have to foot the bill if there’s a default, as it does with loans. The bank’s bad debt ratio for the first half of 2018 was 0.7%.

That being said, Close Brothers has a disciplined approach to lending and prefers quality to quantity, which is why the group’s book grew at a relatively sedate 7% year-on-year during the half during the half compared to positive net flows of £573m in the asset management business representing an annualised rate of 13% of opening managed assets. Thanks to higher inflows, the company achieved a 25% increase in adjusted operating profit for asset management during the period. 

For the full year, yet to be reported, City analysts are expecting the company to turn in earnings per share growth of 4.6%. On this basis, the shares are trading at a relatively attractive forward P/E of 11.8 and also support a dividend yield of 4%.

So overall, based on Close Brothers’ record of historical growth and its future potential, as well as the bank’s attractive valuation, I believe that the shares could be an excellent buy for your portfolio today. And another fast-growing back I’m positive on the outlook for is Arbuthnot Banking (LSE: ARBB). 

Defensive banking 

One of the UK’s fast-growing challenger banks, Arbuthnot has put in a mixed performance over the past five years, but City analysts are expecting big things from the company over the next two.

Specifically, analysts have pencilled in earnings per share growth of 75% for 2018, indicating that the shares are trading at a forward P/E of 16.4.

Arbuthnot is relatively complicated to understand because the private bank has many moving parts. For example, during the first half of 2017, the firm booked £2.1m of income from its 18.6% share of Secure Trust Bank. Meanwhile, net asset per share fell nearly 20% thanks to the payment of a £44m special dividend. On the plus side, customer deposits and assets under management passed the £1bn milestone.

But despite all of the complexity, I believe that Arbuthnot’s assets under management will continue to grow as savers and investors continue to move away from high street banks to more bespoke offerings. What’s more, private banks tend to be less exposed to harmful economic trends thanks to their wealthy client base.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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