Individually, the banks appeal to a different type of investor — but when combined, they could make a great mini-portfolio.
Standard is a bank in crisis. Falling profits, rising impairment changes, slowing emerging market growth and disagreements amongst the bank’s management team have all weighed on Standard’s share price over the past 12 months.
But now Standard has finally admitted that it is in trouble, and management has started to make changes across the group. Underperforming divisions are being closed, costs are being cut and a new CEO is set to join the group. There’s also talk of a right issue to stabilise the bank’s balance sheet.
Standard’s troubles have depressed the bank’s valuation to a lowly 11.6 times forward earnings. Still, City analysts believe that Standard’s earnings per share will expand by 14% during 2016, which implies that Standard is trading at a forward P/E of 10.3. Moreover, Standard currently offers shareholders a dividend yield of 4.6%.
Standard is a value play, although the bank is still in the early stages of its recovery plan, and there are many risks ahead. That’s why investors should reduce their risk by holding Virgin Money alongside Standard.
A growth play
There’s no other way of saying it; Virgin Money is a growth stock. The bank, which bought nationalised Northern Rock in 2011, has seen its share of the UK financial services market explode over the past four years. Underlying pre-tax profit for 2014 more than doubled year-on-year.
Virgin’s mortgage balances rose 11.8% during 2014, compared to the market average of 1.4%, while net lending expanded by 10.2% during the year. Credit card balances rose 41% and retail deposits ticked higher by 6%, to end the year at £22.4bn.
And Virgin’s success has a lot to do with the way that the bank is shaking up traditional banking methods. For example, Virgin’s opening hours are designed to help customers with busy working schedules. Additionally, the bank offers more competitive products and more customer-centric services.
City analysts believe that these initiatives could see the bank’s earnings per share rise by 60% by 2016 — that’s an average annual growth rate of around 27%.
Unfortunately, for this kind of growth you have to pay a premium. Virgin’s shares are currently trading at a forward P/E of 18.5, which may seem expensive but when you factor in the bank’s growth, this is a premium worth paying.
So, as Virgin shakes up the UK banking market, shareholders should profit from Standard’s recovery.
Combining Standard and Virgin in your portfolio gives you two plays on the banking sector — a recovery play and a growth play. Combining the two banks in your portfolio will also reduce risk allowing you to profit from Virgin’s growth and Standard’s recovery while sleeping soundly at night.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.