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Should You Buy Barclays Plc, Lloyds Banking Group Plc Or One Savings Bank Plc?

For us investors, it is easy to be drawn to the headline news of mega-cap behemoths — indeed, it is sometimes hard to miss the results of these giants, dominating the market news for the day.

Sometimes, however, it can pay to put the market noise to one side and take a look elsewhere for value in the market.  To that end, today I’m going to take look at three companies that do business in the banking services arena of the financial sector.  Two you will likely have heard of before, but the third may have been hidden to most – until now.  So let’s take a look…

Lloyds Banking Group

With a market capitalisation of almost £60 billion, Lloyds (LSE: LLOY) is probably one of the best known banks in the UK.  Leaving the past roller-coaster ride to one side, the bank seems to be heading for somewhat calmer waters as the underlying picture, and the UK economy, starts to improve.

The shares finished the day over 7% ahead, as the market reacted in a positive manner to its first quarter results, released on Friday, despite the bank reporting that pre-tax profit slid 11% in the first quarter to £1.2 billion.

As usual, the market looks forward — and the bank set a positive tone for the full year.  For example: metrics, such as the net interest margin, is now expected to be higher than the previously guided 2.55%. In addition, the bank said that the underlying performance of the business during the quarter improved by 21%, driven by improved income, a decrease in impairments and an improved return on required equity, which improved to 16.0%

Barclays 

Another well-known bank (and not always for the right reasons), is Barclays (LSE: BARC).  Its results, released last Wednesday, were less well received by investors.

It wasn’t the underlying performance of the bank that seemed to unsettle investors, but the potential scale of the costs for fines relating to the rigging of the Libor rate. An additional £800 million was earmarked this quarter, taking the total provisions to over £2 billion.  I think investors are now concerned that this issue has not been resolved and that the final bill could continue to increase each quarter.  Add to that further charges relating to PPI redress and we can see why the shine seemed to be taken off what seemed to be a fairly solid set of first-quarter results. 

Commenting on the results, CEO Antony Jenkins said: “Our Core business, the future of Barclays, generated an adjusted PBT of £2.1bn, up 14% and representing our best quarterly performance in several years.”

Despite the positivity, I think there will be a cloud hanging over these shares until investors see the previous issues finalised, leaving the bank to be able to move ahead, freed from the shackles of the past.

OneSavings Bank

Readers could be forgiven for being unsighted on OneSavings Bank (LSE: OSB), this £700 million market-cap bank encompasses a family of specialist financial services businesses, such as:

  • KentReliance – formally a building society, local to Kent, now its products are offered across the UK;
  • Interbay Commercial – a specialist commercial mortgage provider;
  • Heritable Development Finance — an established lender financing predominantly residential property developments for experienced property developers.

The company listed in June 2014 and, as one can see from the chart below, it has done rather well, outperforming both the big banks and the FTSE 100.

As you can see, the shares reacted positively to the release of the maiden preliminary results, which saw underlying profits more than double and the added bonus of the maiden final dividend.  At 3.9 pence per share, this represented two-thirds of 25% of underlying profit after taxation for 2014 of £56.8m, in line with the bank’s target dividend payout ratio – this leaves the management plenty of scope to increase the payout over time, should they see fit.

Interestingly, there is little coverage of this recently listed challenger bank in the press, making it all the more appealing to investors like me to conduct some further research, whilst others focus on the headline grabbers.

I think that you will agree that small can indeed be beautiful.  The trick is finding a selection of good quality companies, not yet in the news or the mainstream investing community. That is why I am pleased to say that Mark Rogers, one of our top analysts, has been putting in some long hours and has found a stock that has already delivered a powerful return in recent years, and he believes could have an upside potential of 45%!

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Dave Sullivan 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.