The sell-off was clearly disproportionate to the earnings momentum of many of these smaller banks, and it’s no surprise that the share prices of the challengers have rebounded strongly in the last few months.  

While Shawbrook Group (LSE: SHAW) and OneSavings Bank (LSE: OSB) are now trading well above their post-Brexit lows, it would appear there’s still hesitation towards the sector, as both stocks are trading at remarkably low multiples despite releasing positive trading statements recently. Is now the time to pick up these fast-growing banks while they’re still cheap?

Shawbrook Group

Investor confidence in Shawbrook was shattered in late June after the bank announced that it would be taking an impairment charge of £9m in relation to a number of loans that were underwritten despite not matching its lending criteria. This announcement, combined with the resignation of the group’s CFO and Brexit-related panic, resulted in a share price fall of almost 60%.

However, Shawbrook has since said it’s confident that such a breach wouldn’t recur after upgrading its risk management systems, and consequently, sentiment towards the stock has improved, with the bank’s share price climbing from 129p in July to 252p today.

The challenger bank released a strong interim management statement earlier this month, reporting customer loan growth of 19% year-on-year, and a stable net interest margin of 5.6%. Management stated that “the momentum of the first half of 2016 continued into the third quarter” and that Brexit-related uncertainties had had “minimal impact” on the business.

Yet despite the strong trading momentum of the bank, Shawbrook shares can be bought for a P/E of just 9.3 times FY2016 forecast earnings right now, which seems low to me for a company that has generated compound annual revenue growth of an incredible 70% annually over the last three years. 

OneSavings Bank

Similarly, OneSavings Bank’s shares were smashed after Brexit, with the company losing around 47% of its market capitalisation in a matter of days. While the bank’s share price has recovered somewhat, it’s still below its pre-Brexit levels.

OneSavings Bank also reported strong results recently, with loan book growth up 13% for the first nine months of the year. Management stated that the pipeline of new business was at a “record level.”

With analysts pencilling-in earnings per share of 40p for FY2016, OneSavings Bank is trading on a forecast P/E ratio of just 8.1, which looks like a steal to me, especially given the fact the bank paid out dividends of a well-covered 8.7p last year and is thus currently yielding 2.7%.

It must be remembered that the challenger banks are essentially geared plays on the health of the UK economy. I’m under no illusion that in the event of an economic downturn or further government intervention in the buy-to-let property market, the banks’ profitability is likely to suffer. Having said that, I believe there’s a long-term growth story at play here, and in my opinion both banks currently offer strong value for investors with a long-term mindset. 

The post Is this a once-in-a-lifetime opportunity to buy these fast-growing banking stocks? appeared first on The Motley Fool UK.

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Shawbrook’s customer loan book exceeded £4bn in the third quarter, which represents growth of 19% versus December 2015. Shawbrook has also achieved sustained growth and disciplined risk-adjusted margins, with its cost-to-income ratio being in line with management expectations.

Its net interest margin remained stable at 5.6%, with continued tailwinds expected from its deposit book repricing following the interest rate cut in August. Gross originations for the first nine months of the year were £1.5bn, which is an increase of 23% compared with the same period in 2015.

Shawbrook continues to make good progress in each of its divisions. The Property Finance division achieved record levels of originations in the third quarter despite the expected slowdown in the property market in August. The Business Finance division has made good progress in expanding its distribution capabilities as the Regional Business Centres are rolled out, with a number of them expected to be operational by the end of the year. Meanwhile, Shawbrook’s Consumer Division has further widened its distribution channel with the announcement of a partnership with Saga.

Looking ahead, Shawbrook is forecast to increase its bottom line by 11% in the current year and by a further 18% next year. This puts it on a forward price-to-earnings (P/E) ratio of just 7.2, which indicates that it offers excellent value for money.

Uncertain future?

However, Shawbrook faces an uncertain future. Brexit may not yet have caused much pain in the economy, but the Bank of England expects unemployment to rise and GDP growth to slow. This could hurt demand for new loans and Shawbrook’s profitability could fail to meet expectations. And with it being UK-focused, Shawbrook could endure a tough period over the next few years.

Therefore, it may be logical to stick with a larger bank such as Lloyds, which has a better diversified business model as well as size and scale advantages over Shawbrook. Lloyds trades on a forward P/E ratio of 8.5 and while that’s higher than Shawbrook’s rating, it’s highly appealing nonetheless. It also indicates that Lloyds has a wide margin of safety to protect against share price falls.

Furthermore, Lloyds is a superior income stock to Shawbrook. Lloyds currently yields 5.5% from a dividend that’s covered 2.3 times by profit. Shawbrook yields 1.4% from a dividend that’s covered 8.4 times by profit. As such, Shawbrook may have excellent long-term income potential, but Lloyds provides a better income return right now. Although Shawbrook is a sound buy for patient investors, Lloyds remains the more enticing stock for purchase at the present time.

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Furthermore, Aldermore was able to record a return on equity of 18%, with its loan origination increasing by 26% to £1.5bn. And with a core tier 1 ratio of 11%, it’s well-placed to overcome the challenges that lie ahead.

UK vulnerabilities

On that topic, Aldermore and other challenger banks such as Shawbrook (LSE: SHAW) face a very uncertain future. Their UK-focus means they’re particularly vulnerable to a UK recession. While this may or may not come to fruition, it now seems almost inevitable that the UK’s economic performance will falter over the next couple of years. The Bank of England is certainly of that view. It recently downgraded the growth outlook for the UK economy in 2017 from 2.3% to 0.8%. This is the biggest downgrade to the growth forecast by the Bank of England since 1992.

Of course, an economic slowdown will bring reduced demand for mortgages and other loans, while increased unemployment will cause default rates to rise. This could impact negatively on the financial performance of Aldermore and Shawbrook, which means that investors may be better off buying a more geographically diversified bank such as HSBC (LSE: HSBA).

Global focus

HSBC operates across the globe and is exceptionally well diversified. Although a UK recession would hurt its financial performance, it wouldn’t be as severe as is the case for Aldermore and Shawbrook.

Clearly, HSBC isn’t risk-free and is undergoing a challenging period as it seeks to rejuvenate its financial performance. As part of this, it’s in the middle of a major cost-cutting and efficiency programme that could expand margins and improve profitability. However, the reality is that in the near term, HSBC’s profit is due to fall by 15% in the current year and as a result, its shares may come under pressure in the near term.

Looking further ahead, HSBC is likely to record strong bottom line-growth. Its exposure to the Asian economy is set to positively catalyse its financial performance since financial product penetration is low and increasing wealth is likely to improve demand for mortgages and other financial services across the region. Furthermore, China is transitioning towards a more consumer-focused economy where credit will be demanded in greater quantity. HSBC is well-placed to capitalise on this.

Therefore, due to its greater diversification and exposure to fast-growing markets, HSBC seems to be a better buy than Shawbrook and Aldermore. It may not be performing as well as those two highly efficient, fast-growing banks right now, but external factors may cause the tables to turn over the medium to long term.

The post Do today’s results make this stock the star post-Brexit buy in the banking sector? appeared first on The Motley Fool UK.

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While Taylor Wimpey is one of the healthiest housebuilders around, with strong margins and low debt, the highly cyclical nature of the industry scares me. With analysts expecting earnings growth to slow for the second consecutive year and a post-Brexit hangover likely to be on the way, I don’t believe this is the best time to begin a position in Taylor Wimpey.

Challenges for the challenger

Challenger bank Shawbrook (LSE: SHAW) also posted solid half-year results with a 14% year-on-year rise in pre-tax profits and an increase in return on tangible equity to 21.2% on an annualised basis. Despite these positive results the market is always forward-looking and judging by the mere 1.3% rise in share prices this morning, a good six months doesn’t compensate for the bank’s high exposure to any Brexit-related slowdown.

That’s because Shawbrook focuses entirely on lending to small and medium sized enterprises, the largely domestic-oriented firms that are most at risk from several years of economic turbulence. On top of this macro challenge is the £9m impairment charge the bank took late last month due to irregularities in its lending practices at one division. These are exactly the type of internal problems that challenger banks were supposed to improve on compared to larger rivals. Internal risk management issues, a slew of new C-suite executives and exposure to any economic slowdown are reason enough for me to avoid Shawbrook shares right now.

Debt load

The latest trading update from pub chain Marston’s (LSE: MARS) revealed like-for-like sales rose at least 2% across all divisions over the past 42 weeks. This improvement came despite Euro 2016, which was supposed to lead to sales decreasing at the food-centric pubs Marston’s is known for.

However, this good news can’t make up for the elephant in the room, which is net debt of £1.2bn that was five times EBITDA at half-year results. While property-focused companies such as pub chains can afford to have relatively higher levels of debt, this is still enough to worry me.

The main reason is that there’s little prospect for runaway growth in the pub sector. Footfall is decreasing across the industry, which is why Marston’s has focused so heavily on food service. Without incredible growth ahead of it, dividend growth and expansion is likely to slow in the future as interest payments require greater attention. While income investors may find Marston’s 5% yield and relatively stable business attractive, I’ll be looking elsewhere due to spotty growth prospects and high debt.

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Industrial components builder Brammer (LSE: BRAM) has seen its stock value plummet 51% in midweek trade, following a shock profit warning. Brammer advised that “we have seen a significant slowdown in sales” since its last update on May 13th, advising that sales per working day had cooled across both the U and Europe.

And these travails have extended into June, Brammer added, advising that its UK division “has experienced a particularly weak performance over the last few days.” The engineer now expects pre-tax profit for the first half to fall below expectations, at £5m, bringing it close to its net debt/EBITDA bank covenant.

The impact of the UK’s Brexit decision is clearly hampering the outlook for many of the Footsie’s stocks, and Brammer does not appear to be immune to this. And with the business dealing on a P/E rating of 12.6 times, I believe the firm’s high risk profile is far from factored in at current share prices.

Services star

Diversified services provider Bunzl (LSE: BNZL) gave the market more reason for cheer, however, with an upbeat trading statement sending its share price 4% higher from Tuesday’s close. Bunzl said that it expects group revenues to have trotted 9% higher during January-June, thanks to the impact of M&A activity.

And the company — which provides everything from rubber gloves and helmets to cutlery and hygiene wipes  — gave further cause for optimism with news of two new acquisitions in the UK and Belgium.

While last week’s vote has changed the game for the vast majority of companies, I am confident that Bunzl can keep its terrific growth story rolling, thanks to the indispensable nature of its products, not to mention broad diversification by both industry and geography.

Consequently, I reckon Bunzl is a shrewd stock pick, even on an elevated P/E rating of 20.2 times.

Bank hits back

Shares in Shawbrook Group (LSE: SHAW) remain extremely volatile following Tuesday’s hair-raising update, the stock recently dealing 23% higher from the close. 

The challenger bank shocked markets yesterday by advising that it expects to book £9m worth of impairments during the second quarter due to “irregularities” in lending activity at its Asset Finance department. The news prompted Shawbrook’s chief finance director Tom Wood to fall on his sword.

Shawbrook advised that these issues have now been rectified. But I believe the wider problems facing the British economy following last week’s referendum makes the bank a risk too far at present. Indeed, at 172p per share, Shawbrook’s stock is still well below last Thursday’s closing price of 295p.

While some may argue that a forward P/E rating of 7.7 times more than bakes in concerns of a domestic downturn, I am not so sure, and reckon investors shouldn’t be swept up by the renewed appetite for Shawbrook’s shares.

The post Should you buy Shawbrook Group plc, Brammer plc and Bunzl plc today? appeared first on The Motley Fool UK.

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Brexit has caused the share price of Barclays (LSE: BARC) to fall by around 28%. However, the bank was experiencing weak investor sentiment prior to Brexit, with its new strategy and subsequent dividend cut causing its shares to come under pressure in recent months.

While disappointing, this share price fall presents investors with an opportunity to buy Barclays at a time when it’s trading on an ultra-low valuation. For example, it has a forward price-to-earnings (P/E) ratio of only 6.2, which indicates that an upward re-rating is very much on the cards. The bank’s new strategy could be a catalyst for that, with Barclays now more focused on improving its balance sheet strength and in reorganising its asset base so as to become leaner and more profitable.

Such moves could convince the wider market that Barclays will survive any downturn resulting from Brexit, and while its shares could come under pressure in the short run, for long term investors I think the present time is a superb opportunity to buy in.

A star for the long term

Also falling post-Brexit have been shares in Santander (LSE: BNC), although they have been hurt in the last couple of years by weakness in another key market for the bank: Brazil. Looking ahead, Santander could continue to fall in the short run due to the potential for further challenges in Brazil as well as uncertainty in the UK. However, its geographic diversity, financial strength and low valuation make it a star long term buy.

For example, Santander is a true global banking major. It operates in a wide range of geographies, which should offer some protection against weakness in key markets. And with a P/E ratio of only 8.1, it seems to offer excellent value for money. That’s especially the case following its fundraising of 2015, which saw it seek €7.5bn from investors in a share sale. Although this may not prevent nervous investors causing volatility in Santander’s shares in the short run, it improves the bank’s long term prospects and helps to make now a great time to buy it for the long haul.

Wait for further news

Meanwhile, shares in Shawbrook (LSE: SHAW) have fallen by a further 7% today, after the release of a trading update. It contains details of an irregularity in the bank’s Asset Finance division which saw a number of loans being underwritten which did not meet the business’s strict lending criteria. As a result of this, Shawbrook expects to book an additional impairment charge of £9m, which is clearly disappointing for the bank’s investors.

With Shawbrook being UK-focused, its future performance is largely dependent upon how the UK economy — specifically the housing market — performs. With uncertainty being high, and the UK housing market already being overheated, it may be prudent to await further news from Shawbrook before buying a slice of it.

The post Is this a once-in-a-lifetime opportunity to buy Barclays plc, Banco Santander SA and Shawbrook Group plc? appeared first on The Motley Fool UK.

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The key reason for this is the company’s strategy, which includes a mix of asset disposals as well as other self-help measures that are putting it on the path to strong growth. For example, RSA is reducing expenses, improving customer service levels, making pricing and underwriting improvements, as well as increasing the use of technology where possible.

Together, these changes are forecast to aid RSA in delivering a 45% rise in net profit in the current year, followed by growth of 21% next year. Both of these figures have the potential to improve investor sentiment in the stock and with RSA trading on a price-to-earnings-growth (PEG) ratio of just 0.6, it seems to have significant upward rerating prospects.

Long-term buy

Also reporting today was esure (LSE: ESUR), with the insurer stating that it’s on track to meet full-year guidance following a strong quarter. Gross written premiums increased by 15.5% versus the comparable quarter of the previous year, while in-force policies grew by 1.7%. Furthermore, esure’s comparison website Gocompare.com made very good progress in the quarter, with it recording income growth of 19%. esure is expecting an increase of 20%-30% in Gocompare’s pre-tax profit for the year and its new advertising campaign seems to be performing well.

With esure expected to increase its bottom line by 12% this year and by a further 19% next year, it could benefit from rising investor sentiment over the medium term. As with RSA, esure has a relatively low valuation, with its shares trading on a PEG ratio of only 0.7. This indicates that they offer a wide margin of safety and could prove to be an excellent long-term buy. That’s especially the case since esure currently yields around 4.7%.

Meanwhile, challenger bank Shawbrook (LSE: SHAW) today announced that it has experienced a positive start to the year. Its first quarter saw underlying pre-tax profit rise by 29% versus the same period of last year, with increased originations and continued operational leverage aiding its financial performance. Net loans and advances increased by 6% to £3.57bn in the quarter, with Shawbrook’s common equity tier 1 (CET1) ratio of 13.4% being ahead of its long-term target of 12%.

Looking ahead, Shawbrook expects to pay its maiden dividend in 2016 and while this is likely to be a relatively small amount, in 2017 it’s due to pay out around 30% of net profit to its shareholders. At its current share price, this equates to a yield of around 4.1% and with Shawbrook set to continue to grow its bottom line at a double-digit rate over the medium-to-long term, its appeal as an income play could be significant.

The post Will RSA Insurance Group plc, Shawbrook Group plc and esure Group plc soar after today’s results? appeared first on The Motley Fool UK.

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In fact, those two banks are seeing their mortgage books rise at a rapid rate and with their earnings set to grow by 33% (Shawbrook) and 40% (Virgin Money) in the current year, they have a clear catalyst to cause investor sentiment to improve. Additionally, with both banks trading on relatively appealing valuations, they have clear capital gain potential – as evidenced by price-to-earnings-growth (PEG) ratios of just 0.3 apiece.

Although they’re attractive investments, challenger banks have thus far had it all their own way. In other words, trading conditions have been highly favourable, with the UK economy recording excellent growth numbers in recent years and demand for credit being sky-high due to a loose monetary policy.

While such circumstances may last in the short-to-medium term, inevitably in the long run things will change. Interest rates will rise, the UK economy will experience a downturn and earnings growth may be more difficult to come by. In such a situation, the financial performance of challenger banks such as Shawbrook and Virgin Money could disappoint and their valuations could come under pressure.

Establishment appeal

In this scenario, a larger, better established bank with a more diverse income stream (both in terms of financial products and geographical exposure) could prove to be a better buy. In this regard, Barclays (LSE: BARC) has huge appeal since it’s a truly global bank with a range of investment and retail banking services. As such, Barclays may be better able to withstand difficult trading conditions than challenger banks such as Shawbrook and Virgin Money and with it having a P/E ratio of just 9, its shares may prove to be somewhat more defensive too.

Furthermore, Barclays could match its challenger peers when it comes to earnings growth. In 2016, its bottom line may be forecast to rise by just 6%, but in 2017 Barclays is expected to record an increase in net profit of 34%. This puts it on a PEG ratio of just 0.3 and indicates that it has superb capital gain prospects over the medium term.

In addition, Barclays is due to yield 2.7% this year from a dividend that has scope to rise at a rapid rate as a result of a modest payout ratio and the aforementioned upbeat earnings growth forecasts. With Shawbrook and Virgin Money yielding 1.5% and 1.7% respectively this year, Barclays seems to be a much more enticing income play for 2016. As such, and while Shawbrook and Virgin Money hold significant appeal, Barclays may still be the preferred option at the present time.

The post Is It Time To Ditch Barclays PLC And Buy Challenger Banks Shawbrook Group PLC & Virgin Money Holdings (UK) PLC? appeared first on The Motley Fool UK.

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Shares in challenger bank Shawbrook (LSE: SHAW) have today been given a boost by an upbeat set of results for the 2015 financial year. The lender’s underlying pretax profit increased by 63% to £80m and this was driven largely by a 44% increase in the bank’s loan book. It now stands at £3.4bn and, alongside a fall in the cost:income ratio to 48.3%, Shawbrook appears to be well-placed to benefit from the continued improvement in the UK economy.

Looking ahead, Shawbrook remains confident in its long term outlook and is aiming to pay a modest dividend in 2016. It is expected to increase its bottom line by around 31% in the current financial year and this puts it on a very appealing price to earnings growth (PEG) ratio of 0.3. This indicates that its shares could be set to soar and while there are regulatory risks, as well as the potential for deteriorating economic performance, Shawbrook’s risk/reward ratio seems to be hugely appealing.

Breaking the code

Also reporting today was asset manager Schroders (LSE: SDR). It delivered a rise in pre-tax profit of 14% and enjoyed net inflows of £13bn during the course of 2015. This helped to increase its assets under management to £314bn from £300bn at the end of 2014. With Schroders increasing its pre-tax profit at a double-digit rate, it has been able to deliver an increase in dividends of 12%, which puts it on a yield of 3.2%.

However, the dominant news story regarding Schroders today is the decision of its CEO to step down in order to become the company’s non-executive Chairman. This goes against the UK Corporate Governance Code which states that a CEO should not go on to become chairman of the same company. As such, investor sentiment in Schroders could be hurt by this move in the short run, which makes other stocks more appealing at the present time.

Risk priced in

Meanwhile, Santander (LSE: BNC) continues to record a strong comeback following a dismal period. Its shares have risen by 18% in the last month but still offer exceptional value for money. For example, they trade on a P/E ratio of just 9.7 and with the company’s bottom line expected to grow by 7% next year, now could be a good time to buy a slice of it.

That’s especially the case since Santander conducted a fundraising in 2015, which shored up its financial position. Furthermore, it remains a highly diversified global bank. Certainly, it faces problems in Brazil where the economic outlook remains uncertain, while another key market, the UK, is in the midst of a potentially transformative period which could see it vote to leave the EU. Because of these factors, Santander’s shares are relatively risky, but this appears to be fully reflected in the bank’s valuation, thereby making it a worthwhile purchase for the long term.

The post 3 Stocks Poised For Major Gains? Banco Santander SA, Shawbrook Group PLC And Schroders plc appeared first on The Motley Fool UK.

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But looking ahead, Hargreaves Lansdown may be unable to repeat such a strong level of outperformance. Certainly, its outlook as a business remains highly encouraging with its bottom line being due to rise by 18% in the current year. However, with its shares trading on a price-to-earnings (P/E) ratio of 37.6, they appear to fully reflect its upbeat potential.

Furthermore, Hargreaves Lansdown lacks appeal as an income play too. For example, it yields just 2.5% and with dividends representing 94% of profit, there seems to be limited scope for an increase in shareholder payouts over the medium term.

Of course, the future of other financial services companies is also uncertain. Notably, challenger banks such as Shawbrook (LSE: SHAW) face the threat of being forced to hold higher amounts of capital in case of worsening economic performance. This could hurt their profitability and as such, challenger banks have seen their valuations come under pressure in recent months. Shawbrook’s shares have been relatively volatile and have fallen by 6% in the last six months.

Despite this, Shawbrook’s valuation appears to adequately price-in the uncertainty. It trades on a P/E ratio of just 11 and with its net profit expected to rise by 30% this year, it equates to a price-to-earnings growth (PEG) ratio of only 0.4. And with dividends representing only 12% of net profit, there’s scope for Shawbrook’s 1.1% yield to rapidly rise in 2017 and beyond.

More falls ahead

Meanwhile, HSBC (LSE: HSBA) continues to be hurt by doubts surrounding the Chinese growth story with today’s share price correction in Shanghai causing investor sentiment in HSBC to decline. Due to this, HSBC is down by 3.3% already in 2016, which puts it on a P/E ratio of just 10.3. This indicates that there’s upward rerating potential, although in the short run a further fall in its share price seems relatively likely.

Clearly, HSBC’s cost base is a key area of focus for the bank over the medium-to-long term with it appearing to be inefficient compared to a number of its rivals. With a cost-cutting programme having been started, HSBC’s cost-to-income ratio could fall and this may have a positive impact on investor sentiment.

While interest rates are set to rise this year, HSBC’s yield of 6.5% is still likely to hold tremendous appeal. That’s especially the case when dividends are covered 1.5 times by profit and their growth rate is likely to beat inflation over the medium-to-long term. Therefore, while HSBC underperformed the FTSE 100 by 7% last year, it has the potential to beat the wider index in 2016 and beyond – particularly on a total return basis.

The post Will HSBC Holdings plc, Hargreaves Lansdown PLC And Shawbrook Group PLC Beat The FTSE 100? appeared first on The Motley Fool UK.

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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended Hargreaves Lansdown and 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.