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HSBC Holdings plc & OneSavings Bank PLC: The Perfect Partnership

It’s no secret that HSBC (LSE: HSBA) (NYSE: HSBC.US) is struggling. Indeed, the bank’s fourth quarter and full-year 2014 results missed City expectations by a mile, and the volume of legal challenges facing the bank is shocking.

Moreover, the costs of running HSBC in an increasing strict regulatory environment are spiralling out of control. And rising costs are holding back growth.  

Uncontrollable

It is becoming increasingly clear that the huge size of HSBC is becoming a stumbling block for the bank. Management can no longer keep an eye on all of the bank’s dealings around the world. For this reason, some analysts have already started to call for HSBC to be broken up.

However, at present levels HSBC’s shares support a dividend yield of 5.9% and the payout is covered one-and-a-half times by earnings per share. For some investors, a yield of 5.9% could be too hard to pass up and the payout looks like it’s here to stay.

Still, HSBC is going to struggle to grow over the next few years. So, for investors who are looking for both growth and income in their portfolios, OneSavings (LSE: OSB) could be the perfect partner for HSBC.

Top challenger

OneSavings is one of the UK’s fastest growing challenger banks. What’s more, the bank is currently trading at a bargain-basement valuation which undervalues the challenger’s long-term potential.

Specifically, at present levels OneSavings is trading at a forward P/E of only 8.5, which makes it one of the cheapest banks in the banking sector. Additionally, City analysts expect the company’s earnings per share to expand by 18% this year, and a further 14% during 2016. These projected growth rates, along with the bank’s low valuation, mean that OneSavings currently trades at a PEG ratio of 0.5, implying that the shares offer growth at a reasonable price. 

It’s not just OneSavings’ valuation that makes the bank a perfect partner for HSBC in your portfolio. OneSavings is also an extremely well-run business with a high return on equity — a key measure of banking profitability — and robust capital ratio.

Specifically, OneSavings reported a ROE of 30% for the six months ended 30 June 2014, a tier one capital ratio of 11% and cost-income ratio of 29%. In comparison, HSBC reported a ROE of 7.3% for 2014, a tier one capital ratio of 10.9% and a cost-income ratio of 67.3%! 

A hidden gem

So all in all, the numbers suggest that OneSavings could be one of the market's best hidden gems, something we're always on the lookout for here at the Motley Fool. And while searching for the market's next multi-bagger, our analysts have recently identified a stock that could drive a three-fold increase in sales in just 5 years.

This undiscovered gem has a proven advantage over its peers and is being led by a maverick CEO that doesn't do things by the book. 

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