This bargain FTSE 250 growth stock is thumping the RBS share price

Royal Bank of Scotland Group plc (LON: RBS) is returning to health but this FTSE 250 (INDEXFTSE: MCX) challenger has given it a run for its money, says Harvey Jones.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Challenger OneSavings Bank (LSE: OSB) has been on a tear lately but tripped up today, falling 2.35% after announcing a dip in net interest margins and jump in its loan loss ratio. However, this stock might still be the one for those seeking an alternative to the big banks.

Power of One

The £1bn FTSE 250 lending and retail savings group posted a 17% rise in profit before tax to £91.8m in its half-yearly results to 30 June. It also reported net loan book growth of 11%, driven by a 17% gain in gross organic origination to £1.44bn. Basic earnings per share (EPS) rose 13% to 27.3p.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

There were also some negative numbers in there. Net interest margins dipped 23 basis points to 301bps, a drop of 7%. Its loan loss ratio jumped from 4bps to 11bps year-on-year as growth in property values slows. Return on equity dipped from 28% to 26%, and even though the common equity tier 1 capital ratio is strong at 13.3%, that’s down slightly from 13.7% in full-year 2017.

Good as Golding

CEO Andy Golding nevertheless hailed “excellent shareholder returns,” with volume growth driven by high demand for its professional buy-to-let and commercial and semi-commercial products. The Treasury tax crackdown has hit demand but this has been partially upset by rising remortgage business.

Golding also highlighted a “market-leading cost to income ratio” of 27% (28% in H1 2017). The interim dividend was hiked 23% to 4.3p per share, and the forward yield is now 3.3%, with meaty cover of 3.6. Yet the stock trades at a forward valuation of just 8.3 times earnings.

Perhaps I can understand investor caution. EPS growth has clocked in at 82%, 43%, 20% and 23% for the past four years, but forecasts suggest just 5% in 2018 and 6% in 2019. Also, the full force of those buy-to-let tax relief cuts has yet to be felt. Rising UK interest rates will both help and hinder, but OneSavings still looks good value to me.

Royal relief

While the OneSavings share price has jumped 15% over the last year, and 97% over two, Royal Bank of Scotland Group (LSE: RBS) is foundering, down 3% in the last 12 months. That’s despite finally announcing a 2p-per-share interim dividend earlier this month, the first since its taxpayer bailout.

RBS is finally shaking off its bad boy reputation, having agreed a final cash settlement of $4.9bn with the US Department of Justice for the misselling of residential mortgage-backed securities. Yet this has failed to whet investor appetite for the stock.

Bull or bear

Nor has a price-to-book value of just 0.88 and valuation of 9.8 times earnings. Not to mention the forecast yield of 2.7%, handsomely covered four times. City analysts reckon that could hit a juicy 5.5% by the end of 2019. Why aren’t investors thirsting after that?

Forecast EPS growth 5% this year, and 6% in 2019 isn’t spectacular, but hardly disastrous either, although anticipated revenue growth of just 1.6% looks poor. Macro factors are scaring many. Higher interest rates may boost net margins, but at the expense of a slowing global economy, while the end of QE won’t help. RBS still looks like a strong long-term buy, if you still feel bullish on the global economy.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

harveyj has no position in any of the shares 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Portrait of construction engineers working on building site together
Investing Articles

Is this FTSE 100 stock the best housebuilder to invest in?

One FTSE 100 housebuilding stock has outperformed all of its industry peers by a big margin this year. Should I…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

2 cheap dividend growth stocks I’d buy as the economy sinks

I'm searching for the best bargains to buy following recent market volatility. Here are two top dividend growth stocks I…

Read more »

estate agent welcoming a couple to house viewing
Investing Articles

Here’s 1 FTSE stock primed to benefit from the current housing market!

With the current housing market as it is, Jabran Khan explores a related FTSE stock that could provide stable and…

Read more »

Portrait of construction engineers working on building site together
Investing Articles

Here’s why this AIM-listed stock could be one of the best shares to buy!

This Fool is looking for the best shares to buy. Despite macroeconomic issues, this stock could be a great long-term…

Read more »

Elderly father and adult son work in the garden
Investing Articles

This penny stock could be set to soar! Should I buy shares?

This Fool looks closely at a penny stock operating in an exciting growth market that could see its shares rise…

Read more »

Illustration of bull and bear
Investing Articles

The next stock market recovery looks imminent

As the stock market bear gives way to the bull, some stocks are already turning up and I'm ready to…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

2 dividend shares to protect me from soaring inflation

Dividend shares can be an excellent way to keep up with inflation. Our writer explores several options to protect his…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

Is it time to buy Unilever stock?

Unilever stock has underperformed in the last five years. But with its portfolio of powerful brands, should I buy now…

Read more »