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Old Mutual plc and OneSavings Bank plc are more attractive to me than Barclays plc

The financial sector is probably one of the market’s most unpopular sectors right now. Old banking giants such as Barclays (LSE: BARC) are struggling to compete in today’s environment, and shareholders are being forced to bear the brunt of the pain.

On the other hand, banking start-up challengers such as OneSavings (LSE: OSB) are grabbing an ever increasing share of the banking market, and investors are reaping the rewards.

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A tale of two banks 

Since the end of 2011, Barclays’ unadjusted pre-tax profit has fallen by more than 50% and next year City analysts are expecting the bank to report earnings per share of 15.9p, which is significantly below the 25.7p reported for full-year 2011. 

But while Barclays has been shrinking, OneSavings has been growing rapidly. Over the past three years, the bank’s pre-tax profit has trebled, and City analysts expect pre-tax profit to increase by around 20% of this year while earnings per share are projected to grow by around 9%. Next year, earnings growth of 11% is expected, putting the bank on a 2017 forward P/E of 6.8 – that’s exceptionally cheap for the bank that’s currently on course to grow pre-tax profit by 340% over five years by the end of 2017.

In comparison, shares in Barclays are trading at a forward P/E of 11.2, despite the fact that earnings per share are expected to fall by 4% this year. Granted, City analysts expect the bank’s earnings per share to expand by 41% next year, although in the past Barclays has struggled to meet these forecasts and there’s no reason to believe that the bank will be able to meet this lofty growth target.

And OneSavings’ shareholders have done extremely well holding the bank’s shares since it came to market back in June 2014. 

Since the end of June 2014, shares in OneSavings have gained 72%. However, shares in Barclays have lost 30%, excluding dividends over the same period. 

Simply put, since the end of June 2014, OneSavings has outperformed its larger peer by around 100% and as the bank continues to grow there will be further gains to come.

Undeserved sell-off

Old Mutual (LSE: OML) is another financial titan that’s fallen out of favour with the market. 

Old Mutual’s home market is South Africa, and concerns about the state of South Africa’s economy have weighed on the company’s shares for much of the past 12 months. Nonetheless, Old Mutual also has a large business here in the UK, and the market seems to be missing the fact that the company isn’t just a small African business, it is, in fact, a global operation and one of the largest money managers in the world.

Recent declines have left Old Mutual’s shares trading at an exceptionally attractive valuation. The company’s shares currently trade at a forward P/E of 9.9 and support a dividend yield of 4.4%. Current city projections suggest that the group’s earnings per share will increase by 9% next year, giving a 2017 P/E of 9.1 and the dividend payout will increase by more than 10% for a yield of 4.9%.

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