How Virgin Money Holdings (UK) PLC May Be A Better Buy Than HSBC Holdings plc

Since listing in November last year, Virgin Money (LSE: VM) has seen its share price rise by 30%. That’s a stunning rate of growth and shows that investor demand both for new listings and for new banks is strong. In fact, over the same time period, larger sector peer, HSBC (LSE: HSBA) (NYSE: HSBC.US), has declined in value by 12%, as the scandal involving alleged tax evasion in Switzerland has severely dented investor sentiment.

Growth Prospects

Of course, a key reason for investor optimism in Virgin Money is its stunning growth prospects. For example, it is forecast to increase its bottom line by 4% in the current year, followed by growth of 51% next year. Together, they mean that Virgin Money’s earnings are set to be a whopping 57% higher in 2016 than they were in 2014 and, despite this, the stock trades at a very reasonable price that appears to offer excellent value for money.

For example, Virgin Money has a price to earnings (P/E) ratio of just 16.6 and, when this is combined with its excellent growth prospects, equates to a price to earnings growth (PEG) ratio of just 0.2. This indicates that its share price could continue to move sharply upwards over the medium term.

Contrast this situation with that of HSBC, which last year posted an 18% fall in earnings as a result of a slowdown in Asia and an inability to deliver efficiency savings. In fact, HSBC’s operating costs were among the highest they have ever been in the bank’s recent results, which is disappointing given that many of its peers have successfully reduced their cost base.

Despite this, HSBC is expected to bounce back with 21% growth in earnings this year, followed by a further 5% next year. And, with it having a P/E ratio of just 10, its PEG ratio of 0.5 holds considerable appeal, although it is not as enticing as Virgin Money’s current valuation.

Investor Sentiment

As well as having higher growth prospects and a more appealing valuation, Virgin Money also enjoys better investor sentiment than HSBC. This could be boosted further by the potential for a takeover, with sector peer TSB being the subject of a bid approach recently and meaning that further sector consolidation could be on the cards.

Meanwhile, HSBC looks set to struggle in the short run with further regulatory challenges regarding its Swiss operations, question marks about its management team and whether they are the right individuals to lead the bank, as well as a general apathy from investors for mega cap banking stocks, with many of HSBC’s larger peers also seeing disappointing share price performance in recent months.

Looking Ahead

So, on the one hand Virgin Money looks like a better buy than HSBC, with its higher growth prospects, keener valuation and warmer investor sentiment being key reasons to buy it over its sector peer. However, HSBC offers greater diversity than its smaller peer, as well as exposure to fast-growing markets across Asia, considerable stability and the potential to become much more efficient over the next few years. As such, and while Virgin Money is a better growth stock than HSBC, the latter still offers the more complete package for the long term.

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Peter Stephens owns shares of HSBC Holdings. 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.