Are Virgin Money Holdings (UK) PLC & Shawbrook Group PLC Better Buys Than HSBC Holdings plc?

Shares in Virgin Money (LSE: VM) have soared by over 10% today as the challenger bank reported a rise in profitability for the half year to the end of June. In fact, its underlying profit is up 37% versus the same period last year, with an improving net interest margin and a renewed focus on cost cutting and efficiencies being the key reasons behind such strong performance.

Meanwhile, fellow challenger bank Shawbrook (LSE: SHAW) also reported excellent financial figures today, with its pretax profit almost doubling from £18m in the first half of 2014 to almost £35m in the first half of the current year. As with Virgin Money, balance sheet expansion has been a major factor behind Shawbrook’s growth, with its loan book rising from £2.3bn a year ago to £2.7bn at the end of June 2015.

Clearly, both banks are operating amidst very helpful trading conditions, with UK growth numbers being confirmed as very strong today. And, while interest rate rises may cool demand somewhat in 2016 and beyond, the Bank of England has pointed out consistently that a loose monetary policy will not be shelved over the medium term, with rates set to stay low for the duration of the current parliament (i.e. until at least 2020).

As such, the outlook for both banks appears to be very bright and their forecast growth rates are indicative of this. For example, Virgin Money is expected to increase its earnings by as much as 43% next year, while Shawbrook’s bottom line is forecast to post growth of 41% in the current year, followed by 27% next year. And, with the two banks trading on price to earnings growth (PEG) ratios of just 0.3 (Virgin Money) and 0.4 (Shawbrook), they seem to offer excellent value for money and, realistically, their share prices could soar over the medium to long term.

However, neither bank is as well diversified as sector peer, HSBC (LSE: HSBA). Its share price has come under pressure recently as a result of uncertainty surrounding the Chinese stock market and also the wider Chinese economy. Clearly, Asia is a key market for HSBC, but it remains a truly global bank and one of the most (if not the most) diversified bank in the world, with it having exposure to all key, lucrative markets across the globe.

And, while its growth rate may not be on a par with Shawbrook or Virgin Money, HSBC is still expected to grow its earnings by 20% this year and this puts it on a PEG ratio of just 0.5. And, with it having a yield of 5.8% versus 0.8% for Virgin Money and zero for Shawbrook, it also holds much greater income appeal for investors seeking more than just capital gain potential. Furthermore, with cost savings to come through, HSBC could survive the long-awaited monetary policy tightening that will shortly begin better than most of its sector peers.

So, while Virgin Money and Shawbrook are hugely attractive shares to buy at the present time, HSBC appears to be at the head of queue, with its increased diversity and income appeal making it the preferred option.

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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.