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I’m finding these two dirt cheap banking stocks impossible to resist

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Stack of new bank notes
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The banking sector is a scary place for investors, as anybody who has held shares in the big four high street giants will testify. They remain on the rack a dozen years after the financial crisis, as legacy issues repeatedly come back to haunt them.

You might therefore be tempted to invest in one of the ‘challenger banks’ snapping at their heels instead.

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OneSavings Bank

Savings and mortgage provider OneSavings Bank (LSE: OSB) operates in selected sub-sectors of the mortgage market through brands such as Kent Reliance, Precise Mortgages, Prestige, Interbay and Heritable, which offer their products through brokers, rather than directly to customers. It also offers retail savings accounts.

The OneSavings share price is flat after today’s Q3 trading update, despite a 15% rise in the loan book over nine months. Investors were possibly more concerned about net interest margins, which are expected to be broadly flat for the full year.

Recent acquisition Charter Court Financial Services Group posted loan growth of 4%, and is aiming for the high 20s this year, but saw a slight dip in net asset margins. CEO Andy Golding hailed continuing strong performance from both groups despite the “continued uncertain macroeconomic and political outlook”, although I can see why investors aren’t falling over themselves with excitement today. 

Near-zero interest rates are squeezing bank net lending margins, although happily, margins at OneSavings are currently market-leading. The stock is down a disappointing 12% over two years, although up 75% if measured over five. Could it be ripe for a comeback?

We could be looking at a real bargain here, with a valuation of just 6.2 times forward earnings. The forecast yield of 4.2% is generously covered 3.8 times, giving scope for progression. Earnings growth could disappoint if the economy slows, hitting demand and boosting debt impairments, but at today’s price it looks hard to resist.

Barclays

FTSE 100 listed Barclays (LSE: BARC) is a £30bn big beast, even if it used to be bigger, with the share price trading 25% lower than five years ago.

I have repeatedly highlighted Barclays as a bargain acquisition, but I’m still waiting for it to deliver on all that promise. It is still incredibly cheap, at 7.5 times forward earnings, which are forecast to rise 123% this year. The price-to-book value is just 0.5, well below the figure of 1 that is usually seen as fair value. 

The Barclays share price has also been driven upwards in recent weeks by hopes of a Brexit resolution, although there is the small matter of an election first. Thankfully, PPI is now more or less in the past. The scandal has cost the bank £11.2bn.

Barclays is re-establishing itself as an income stock, with a forecast yield of 5.2%, covered 2.4 times. Its investment bank has been hampered by reduced client activity, lower volatility and a smaller banking fee pool, and is under pressure from activist investors. The group has also been hit by falling margins on its residential mortgage business.

A global slowdown would hurt, driving up debt impairments and further squeezing lending margins. Despite all that, Barclays is still difficult to resist at today’s low price, but be warned, I’ve said that about this stock before.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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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