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This bargain FTSE 250 growth stock is thumping the RBS share price

Challenger OneSavings Bank (LSE: OSB) has been on a tear lately but tripped up today, falling 2.35% after announcing a dip in net interest margins and jump in its loan loss ratio. However, this stock might still be the one for those seeking an alternative to the big banks.

Power of One

The £1bn FTSE 250 lending and retail savings group posted a 17% rise in profit before tax to £91.8m in its half-yearly results to 30 June. It also reported net loan book growth of 11%, driven by a 17% gain in gross organic origination to £1.44bn. Basic earnings per share (EPS) rose 13% to 27.3p.

There were also some negative numbers in there. Net interest margins dipped 23 basis points to 301bps, a drop of 7%. Its loan loss ratio jumped from 4bps to 11bps year-on-year as growth in property values slows. Return on equity dipped from 28% to 26%, and even though the common equity tier 1 capital ratio is strong at 13.3%, that’s down slightly from 13.7% in full-year 2017.

Good as Golding

CEO Andy Golding nevertheless hailed “excellent shareholder returns,” with volume growth driven by high demand for its professional buy-to-let and commercial and semi-commercial products. The Treasury tax crackdown has hit demand but this has been partially upset by rising remortgage business.

Golding also highlighted a “market-leading cost to income ratio” of 27% (28% in H1 2017). The interim dividend was hiked 23% to 4.3p per share, and the forward yield is now 3.3%, with meaty cover of 3.6. Yet the stock trades at a forward valuation of just 8.3 times earnings.

Perhaps I can understand investor caution. EPS growth has clocked in at 82%, 43%, 20% and 23% for the past four years, but forecasts suggest just 5% in 2018 and 6% in 2019. Also, the full force of those buy-to-let tax relief cuts has yet to be felt. Rising UK interest rates will both help and hinder, but OneSavings still looks good value to me.

Royal relief

While the OneSavings share price has jumped 15% over the last year, and 97% over two, Royal Bank of Scotland Group (LSE: RBS) is foundering, down 3% in the last 12 months. That’s despite finally announcing a 2p-per-share interim dividend earlier this month, the first since its taxpayer bailout.

RBS is finally shaking off its bad boy reputation, having agreed a final cash settlement of $4.9bn with the US Department of Justice for the misselling of residential mortgage-backed securities. Yet this has failed to whet investor appetite for the stock.

Bull or bear

Nor has a price-to-book value of just 0.88 and valuation of 9.8 times earnings. Not to mention the forecast yield of 2.7%, handsomely covered four times. City analysts reckon that could hit a juicy 5.5% by the end of 2019. Why aren’t investors thirsting after that?

Forecast EPS growth 5% this year, and 6% in 2019 isn’t spectacular, but hardly disastrous either, although anticipated revenue growth of just 1.6% looks poor. Macro factors are scaring many. Higher interest rates may boost net margins, but at the expense of a slowing global economy, while the end of QE won’t help. RBS still looks like a strong long-term buy, if you still feel bullish on the global economy.

Capital Gains

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.