Are these banks better buys than their FTSE 100 peers?

FTSE 100 (INDEXFTSE: UKX) banks are popular among UK investors. But are these bank stocks also worth a look?

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Here in the UK, we have a number of banks listed on the stock market. It’s fair to say that most UK investors probably have some exposure to the sector through the likes of popular dividend-paying stocks such as Lloyds Bank and Barclays. But are these FTSE 100 members the best bank stocks to own right now?

Today, I want to profile two under-the-radar banking stocks that both pay shareholders dividends as well. Could these boost your personal balance sheet?

Close Brothers

Reporting full-year results today is Close Brothers Group (LSE: CBG), a FTSE 250 bank I have long been bullish on. What appeals to me most is its dividend growth track record. Whereas banks such as Lloyds and Barclays slashed their dividends during the global financial crisis, CBG maintained its payout. And since then, it has recorded eight consecutive dividend increases, which is an excellent achievement.

FY2018 results today look solid. For the year ended 31 July, adjusted operating profit rose 4% to £278.6m, and adjusted basic earnings per share increased 5% to 140.2p. The loan book grew 6.6% on an underlying basis to £7.3bn, and the bank generated a return on equity of 17%. Once again, it hiked its dividend by an inflation-beating 5%, taking the total payout per share to 63p (a yield of 3.8%). CEO Preben Prebensen commented: “All of our businesses have continued to successfully navigate and make the most of current trading conditions, while continuing to focus on maximising opportunities in future years.”

So, it appears that the business has momentum at present. But are the shares a ‘buy’ right now?

They don’t look expensive at present, trading on a P/E ratio of 11.8, although that’s a higher valuation than Lloyds (forward P/E 8.0) and Barclays (forward P/E 8.3). Knowing that the stock does tend to move up and down a fair bit, it could be worth waiting for a more attractive entry point, I think. With a bit of patience, it’s probably possible to pick up CBG at a slightly lower price with a yield above 4%. For now, I’m keeping the bank on my watchlist.

Another dividend-paying bank

Another FTSE 250 bank that looks really interesting from a dividend-investing perspective is challenger bank OneSavings Bank (LSE: OSB). Since paying a maiden dividend of 3.9p in 2014, it has increased its payout by 230% and is forecast to reward shareholders with a dividend of 14p per share this year. That equates to a healthy yield of 3.4%, with projected dividend cover of almost four times.

Like Close Brothers, it has a fair bit of momentum at present. In August, the group posted a 17% rise in profit before tax and lifted its interim dividend by a huge 23%.

As a buy-to-let specialist, there are risks to the investment case here in the form of regulatory meddling and property market weakness. Yet, in my view, these risks are already incorporated in the stock’s valuation, as its forward P/E ratio is a low 7.8. When you consider that other challenger banks, such as Shawbrook, Aldermore and Virgin Money, have all been targeted for takeovers recently, that valuation looks worth the risk.

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.

Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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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