Why Barclays plc just can’t compete with Virgin Money Holdings (UK) plc

Barclays (LSE: BARC) has a problem that it just can’t seem to fix: growth. Since 2011 Barclays has been trying everything to try and return to its pre-crisis glory days but to no avail. Its revenue has dropped from £3bn to £26bn as reported last year, and this year City analysts expect revenue to fall further to £20.1bn.

Between 2011 and year-end 2015 Barclays’ earnings per share have dropped from 25.7p to 16.6p and this year the bank is expected to report earnings per share of 12.2p, a 27% fall. It looks as if Barclays is already on track to hit this lower target as the group reported a one-third drop in net profit for the first half of 2016.

A shrinking bank

Looking at the headline figures above, it’s clear that Barclays is struggling to grow. It becomes even more apparent that the bank is fighting a losing battle when you consider the fact that it has closed 117 of its 1,448 branches and shed 11,000 of its 130,000 staff since new boss Jes Staley imposed a hiring freeze around this time last year. Operations in nine countries have also been closed over the period. 

Put simply, Barclays is shrinking rapidly in both revenue and operational terms. The bank’s shares trade at a forward P/E of 14.2, which seems expensive for a shrinking operation.

Rapid growth 

Virgin Money (LSE: VM) on the other hand is charging ahead. The bank is achieving the kind of growth Barclays can only dream of. Over the past two years, pre-tax profit has expanded by more than 300%, and City analysts expect the group to report a pre-tax profit of just under £200m, rising to £220m for 2017. If the bank hits this lofty growth target, pre-tax profit will have grown 550% in just four years.

Despite these lofty growth predictions, however, shares in Virgin Money are trading at a relatively undemanding forward P/E of 9. City analysts have pencilled-in earnings per share growth of 32% this year. Looking at these figures, when compared to Barclays, Virgin’s shares are a steal.

Hitting targets 

Virgin’s growth projections aren’t just the result of some over-optimistic City analysts. The bank is actually growing at a rapid clip. 

For the first half of 2016, the bank reported a 53% increase in underlying profit before tax to £102m. Net lending reached £2.2bn up 29% year-on-year and credit card balances rose 31% year-on-year. Credit card balances jumped to £2.1bn at the end of June this year, and the bank is targeting £3bn of credit card balances for the end of 2017. Management expects this growth to continue, despite Brexit wobbles.

The bottom line 

Overall, Barclays and Virgin are two very different banks with very different outlooks. Virgin is growing rapidly, and the company’s shares look incredibly cheap while Barclays’ shares are relatively expensive and the bank is struggling to grow despite its aggressive cost-cutting.

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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.