UK bank stocks have been getting a bit of attention recently. This could be due to the fact that most are well off their 52-week highs?

Currently, I don’t own any bank stocks in my portfolio. So is now the time to buy some? Let’s discuss.

These stocks are dirt-cheap

I can certainly see some appeal in these stocks right now. For starters, they look cheap relative to the market. The table below shows the forward-looking price-to-earnings (P/E) ratios of the UK’s largest five banks.

Those P/E ratios are low. To put the numbers in perspective, the median P/E across the FTSE 100 index is about 13.5, at present. So there could be potential for share price appreciation here.

One reason to be optimistic about share prices is that profits across the sector are getting a boost from higher interest rates. Banks generate a large chunk of their income from the spread between lending and borrowing rates. The higher rates go, the larger the spreads they can generate.

We saw this in Q3. For example, HSBC’s net interest income surged 30% to $8.6bn, thanks to higher rates. Looking ahead, central banks are likely to continue increasing interest rates in an effort to bring down inflation. So banks’ profits could get a further boost.

Attractive dividend yields

Secondly, there are some attractive dividend yields on offer across the sector at the moment. This table shows prospective yields using analysts’ current dividend forecasts (these shouldn’t be relied upon).

As you can see, Lloyds, HSBC, and NatWest all have yields in excess of 5% right now. In today’s choppy market, a 5%+ yield is attractive, in my view.

One major risk

Of course, the big risk here is the economy. Banks’ performances are closely linked to economic conditions and, right now, conditions look ominous.

Last week for example, the Office for Budget Responsibility (OBR) said that the UK economy (which is already in a recession) is set to shrink by 2% in the next 18 months, leading to over half a million job losses by the second half of 2024.

“The medium-term fiscal outlook has materially worsened since our March forecast due to a weaker economy, higher interest rates, and higher inflation”, said the OBR.

If economic conditions do continue to deteriorate, I’d expect the banks to see higher loan losses. This could lead to lower earnings (and possibly lower dividends too). In this scenario, the stocks may not look so cheap after all.

It’s worth noting here that in HSBC’s Q3 results, it posted expected credit losses (ECL) of $1.1bn, versus $659m a year earlier. This dragged pre-tax profit down 42% to $3.1bn.

Long-term threat

Another issue for long-term investors like myself to consider is the huge amount of disruption in the financial services sector. Right now, FinTech companies such as Revolut, Monzo, and Wise are capturing banking market share. Traditional banks such as Lloyds and Barclays are going to have their work cut out to retain customers.

My move now

Weighing this all up, I’m not in a rush to buy bank stocks for my portfolio right now. Sure, the sector looks cheap. But that’s because economic uncertainty is high.

All things considered, I think there are better stocks to buy for my portfolio today.

The post UK bank stocks have fallen. Should I buy them now? appeared first on The Twelfth Magpie.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, Standard Chartered, and Wise plc. 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.

Investors have been bearish on Lloyds (LSE:LLOY) shares for a few months now. Ever since hitting post-pandemic highs of 55p in January 2022, Lloyds shares have fallen over 20%. They are currently trading at 43p. But all this could change in the coming months. Sings of economic recovery are getting stronger. And with the bank of England (BoE) set to meet in August, I think this could be the perfect time for me to capitalise on the cut-price Lloyds share price before it returns to pre-pandemic highs. 

BoE’s woes

In order to curb inflation in the UK, the Bank of England has steadily increased interest rates this year. After the last hike, interest rates stand at 1.25%, up from 0.1% in December 2021. 

The committee that decides interest rates is set to meet again on 4 August and BoE Governor Andrew Bailey has warned that another 50-point hike is on the table. This would take the interest rate to 1.75%. And given that most estimates suggest an 11% inflation rate by the end of the year, I think the BoE will go through with the 50-point hike. 

The base interest rate hikes throughout this year have already caused a 10% jump in net interest income for Lloyds in the first quarter (Q1) of 2022. And with the banker set to release half-yearly results on 27 July, I expect a similar bump in earnings. But can the extra cash from interest payments alone boost the Lloyds share price?

The Lloyds share price offers value

There is a simple equation to factor in here. Higher base interest rates equal higher earnings for Lloyds bank. And the gap between the interest paid by Lloyds on cash held in accounts (which is expected to remain stable) and the interest received from loans will grow wider.

Also, this is a positive sign for Lloyds shares’ yield of 4.57%. Given the strong cash generation, the board expects to increase yield progressively starting from 2021’s dividend of 2p per share. The Lloyds dividend also comes with an earnings cover of 3.9 times. 

Given these factors, I think the Lloyds share price offers decent value at its current levels. But there are factors that could trigger a further collapse as well. 

When the economy suffers, consumer buying power decreases. And the latest retail sales data backs this up. Fuel, clothing, and housing goods sales all fell by over 3.5% in June 2022. And online sales figures are falling rapidly after seeing a huge surge during the pandemic. Online sales fell by 3.7% last month and accounted for just 25.3% of total retail sales in June, compared to 37.4% in February 2021.

Another factor to consider is how much the average investor would be willing to invest in a recession. Daily trading volume has fallen 23% since March 2022. This is a strong sign that investor activity will drop rapidly if the UK government announces a recession.

However, the Lloyds share price looks more attractive to me compared to other top UK bankers. It’s cheap right now, has a robust yield, and could continue to generate higher revenue for the foreseeable future. I am waiting for the results later this week and would add Lloyds shares to my portfolio if the market reaction is favourable. 

The post Could the Lloyds share price finally be back on its way up?  appeared first on The Twelfth Magpie.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

The rising BARC share price

Barclays works similarly to most banks. It uses customer deposits to provide loans to individuals or businesses and then generates profit from charging interest on these loans. Unfortunately, due to the pandemic causing lockdowns and massive disruption worldwide, many of its borrowers have been unable to keep up their payments. This appears to be a catalyst behind the 50% collapse of the BARC share price in March last year — apart from the wider fall that affected many shares whether it was deserved or not.

Looking at the recently published full-year 2020 results, the decline was somewhat justified. Overall profits fell by 38% to £1.53bn from £2.46bn a year before. And most of this is attributable to the aforementioned missing loan payments that resulted in a £4.8bn credit impairment charge. Needless to say, that’s not exactly positive news. So why has the BARC share price been rising?

Upon closer inspection of the individual divisions of the business, there are some promising signs of growth. In particular, its Corporate Investment Banking segment, which generates around 46% of revenue, grew its profits by a record 29%. Furthermore, its Consumer, Cards & Payments division was unprofitable during 2020 due to reduced consumer spending. However, with lockdown restrictions slowly being eased and businesses reopening their doors, many of the disruptions to Barclay’s revenue stream appear to be vanishing, I feel.

Risks to consider

Most profits are generated by the aforementioned Investment Banking division. But this ultimately exposes the firm to a considerable level of market risk. Making smart investment decisions is a challenging task that requires talented individuals to execute. Suppose the company is unable to retain its skilled teams of investment managers, or a series of poor decisions are made. In that case, the division’s future performance could suffer considerably, impacting both overall profits and the BARC share price.

Another risk to consider is interest rates. In 2020, the Bank of England cut rates to nearly 0% and added further pressure on profit margins for Barclays’ lending operations. This is something that’s ultimately out of the company’s control. And so far, there’s no clear indication of when interest rates will begin to rise again.

The bottom line

Personally, I’ve never been particularly fond of banking stocks, primarily due to the low-interest-rate environment they’ve had to operate in for the last decade.

However, I do have to admit that even after the recent surge in the BARC share price, it still looks like it can climb higher. Its P/E ratio is currently around 21. By comparison, its main competitors like Lloyds and HSBC are trading at P/E ratios of 36 and 31, respectively. To me, this indicates the bank is currently undervalued. And therefore, Barclays is a value investment I would consider making for my portfolio.

The post Can the Barclays (BARC) share price keep climbing? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Barclays. The Motley Fool UK has recommended Barclays. 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.

I know that banks are unlikely to have been your best investment over recent years. The Lloyds share price in particular never recovered from the 2008 crash. But, after much restructuring, Lloyds is now a more focused business.

Furthermore, the compensation payments from the PPI scandals have largely been paid. These payments weighed on profitability for years, indirectly affecting shareholder returns.

The last decade has been tough for Lloyds. However, I think the bank was in a good position before the coronavirus-induced market crash.

Weak share price but strong fundamentals 

The disappointing past performance of the Lloyds share price is likely to be on the minds of many investors. But what happened in the past doesn’t have to be repeated in the future and it’s important to look at the evolving business fundamentals underneath. It’s here that you’ll see the Lloyds share price doesn’t reflect its changing business.

For starters, 31p now buys you a tangible asset per share of 61p. This means that for every £1 you pay, you get almost £2-worth of bank. Admittedly, many banks will trade on less than net asset value as returns are often low. But Lloyds has a return on equity (ROE) of 5%, above Barclays‘ ROE of just under 4%. 

Profitability will likely be low across the banking sector for as long as ultra-low interest rates persist. However, banks need to attract investors, which is why they’re known for being dividend stocks. Consequently, it’s likely they’ll want to reinstate dividends as soon as possible.

Lloyds’ 10% total dividend yield for 2019, compared favourably to other banks, notably to Barclays’ 2.8%. Besides, Barclays offered a scrip dividend, where investors take shares instead of cash. This inflates the dividends per share figure and makes Barclays’ balance sheet look stronger. Assuming a similar approach to future dividends, Lloyds shares are the better offer in my view. 

Financials compare favourably with Barclays

Scrip dividends and other accounting measures can make it hard to compare banks. Consequently, two main ratios can be used to make comparisons easier. These are net interest margins and return-on-asset ratios. Lloyds compares favourably with its peers on both.

Net interest margins are — effectively — the profit the bank makes on its lending. Lloyds does this relatively well. At just under 3%, its margin is slightly lower than that of Barclays (just over 3%). However, the Barclays figure includes money from its investment banking division. Lloyds’ number is purely on lending to UK customers, indicating its higher efficiency.

The return-on-asset ratio is the per-pound profit a bank will earn on its assets. As banks are highly leveraged, these figures are small. I calculated a ROA of 0.36% for Lloyds against 0.29% for Barclays. Using this measure, Lloyds uses its assets more profitably.

It’s likely that for the immediate future, low profitability will continue due to ultra-low interest rates. However, for patient value investors, the Lloyds share price could be a bargain for a strong and sustainable business.  

The post Have £1,000 to invest? I think the Lloyds share price is a bargain appeared first on The Twelfth Magpie.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.

Meanwhile, their FTSE 100 peer Barclays (LSE: BARC), and mid-cap merchant bank Close Brothers (LSE: CBG), which released its half-year results today, have fared less well. The former is up 9% and the latter just 3%.

Could the two laggards be primed for a comeback, and market-smashing returns?

Prudent positioning

Close is an admirable bank with a service-led business model, disciplined approach, and commitment to investing through the cycle. Its philosophy saw it perform resiliently through the Great Financial Crisis, even maintaining its dividend amid the devastation all around it.

Today’s report for the six months ended 31 January was peppered with words such as ‘prudent’ and ‘conservative’. Management isn’t chasing growth in competitive areas of the market, but is focused on maintaining pricing discipline and prioritising credit quality. If history is any guide, you won’t find Close has been swimming naked when the economic tide goes out.

Rich rating

The Banking division delivered a modest 1% increase in adjusted operating profit in the latest period. Meanwhile, its smaller Asset Management and market-making (Winterflood) businesses remained profitable, but saw profits decline year on year. Net inflows in Asset Management were more than offset by negative market movements, while Winterflood was impacted by lower trading volumes. As a result, group adjusted operating profit was down 4%.

I’m expecting a similar outturn for the full year, and conservatively estimate EPS in the region of 136p and a dividend of 65p. At a share price of 1,480p, this gives a price-to-earnings (P/E) ratio of 10.9 and a dividend yield of 4.4%. Along with a price-to-tangible net asset value (P/TNAV) of 1.98, this is a rich rating relative to Footsie peers.

I don’t think now is the ideal time to buy the stock, but it’s a bank I’d be happy to hold through the economic cycle. I rate it a ‘hold’ at this stage.

Classic value opportunity

Barclays is dirt cheap compared to Close. At a share price of 163p, it has a P/TNAV of 0.62 and trades on a forward P/E of 7.4, with a prospective dividend yield of 4.6%. Of course, while Close has built an excellent reputation for trust among its customers and shareholders, Barclays has been a scandal-ridden business for years. It’s paid a heavy price for past misdeeds, both in financial terms and investor trust.

Given that the current management team is untainted by the past, and increased regulatory scrutiny since the financial crisis, it’s hard to believe Barclays will be quite as ‘accident-prone’ in the future. And with its latest results showing an improving financial performance, I can certainly see there’s a case, as my Foolish colleague Roland Head has argued, that Barclays represents a classic value investing opportunity.

More cautious view

On the other hand, I’m concerned about where we are in the economic cycle. And also about the fallout of a possible no-deal Brexit, which has another of my Foolish colleagues, Alan Oscroft, holding back some cash for potential post-Brexit banking bargains.

If Roland’s right, Barclays could smash the FTSE 100. However, I think this is one that really could go either way. On balance, I lean towards the more cautious position of avoiding the stock for the time being.

The post Is the Barclays share price primed to smash the FTSE 100? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.

Could this be an opportunity for contrarian investors to buy into the global bank? Or, is a turnaround in its performance unlikely given the bank’s struggling profitability?

Weak results

The bank’s first-quarter results certainly don’t give investors much reason to be confident about a turnaround in its performance. Pre-tax profits fell by 3% to $6.03bn, below market expectations, following yet another provision for legacy misconduct issues and rising costs, which outstripped revenue growth.

An unexpected $2bn share buyback also did little to boost investor sentiment, as the bank announced that further buybacks in the remainder of the year were unlikely.

Rising rates

On the other hand, there are some analysts that remain bullish on the stock, as the rising US dollar interest rate environment provides a very significant tailwind for the lender’s financials.

With its large deposit base, HSBC is particularly well-placed to benefit, given that it has a competitive advantage on the cost of funding. What’s more, recent loan growth has been encouraging, with a 2% increase in its loan book in the first quarter.

Still, I reckon there must also be evidence of further improvement on the cost side, before a re-rating in its shares becomes likely. This is because, with a forward price-to-earnings ratio of 15.9, HSBC shares already trade at a premium to its UK domestic peers. As such, HSBC can’t just rely on rising rates to boost its profitability. Looks like we might have to wait a bit longer for the HSBC share price to hit 800p.

A better option?

Elsewhere, TBC Bank Group (LSE: TBCG) may be a better emerging market bank play. I believe key financial metrics for Georgia’s largest retail bank appear to be in much better shape, while valuations are undemanding, relative to its peers and to their expected growth rates.

Of course, as a domestically-focused bank, TBC is vulnerable to geopolitical risks and external shocks affecting the Georgian economy. And although robust economic expansion in the near term is expected to support the bank’s financials, it’s also important to realise Georgia’s economy is relatively small and highly dependent on foreign direct investment.

So far though, the macro environment remains supportive, and the bank’s return on equity has continued to stay above 20%. Looking ahead, City analysts expect the bank’s adjusted earnings will grow by 15% in the current financial year. And this to be followed by a further expansion of 12% in 2019.

TBC shares trade at just 8 times its expected earnings this year, and a mere 6.9 times its expected earnings in 2019, which compares favourably with its banking peers — particularly its closest rival, BGEO Group, which trades at 7.5 times its expected earnings in 2019.

The post Where is the HSBC share price headed next? appeared first on The Twelfth Magpie.

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Jack Tang has a position in Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.

It seems that, to some extent, the market still considers Lloyds to be a recovery play, and it is valuing it as such. But this is an incorrect interpretation of where the business is today and what it has achieved over the past decade.

Indeed, today Lloyds is one of the most efficient and profitable banks in the whole of Europe and barring any significant unforeseen shocks, it is set to continue on this course for the foreseeable future.

Too cheap to pass up? 

At the time of writing, the Lloyds share price is trading at a forward P/E of 8.5, a discount of 23% to the broader UK banking sector. In my opinion, shares in Lloyds should trade at a premium, not a discount, to the rest of the sector because it is far more profitable than peers.

According to City analysts, last year it achieved a return on equity (a measure of banking profitability), excluding charges related to payment protection insurance, of 15.6%. For comparison, HSBC, which is the world’s fifth-largest bank, and the largest non-China-based lender, achieved a return on equity of 5.9% for 2017 and only 0.8% in 2016. 

Nonetheless, despite the fact Lloyds is three times more profitable than its larger peer, the stock trades at a discount of 33% to that of HSBC.

Cutting costs 

Management is planning to make Lloyds much more profitable over the next three years. In February the group updated its three-year growth plan targeting profit growth of 25% by 2020 powered by a £3bn digital investment plan and the expansion of its pension, insurance and business lending arms. 

Lloyds also wants to cut its cost-to-income ratio to the “low 40s” by the end of 2020, down from 46.8% as reported for 2017 and 48.7% for 2016.

Add all of the above together and it quickly becomes apparent how undervalued the shares are today. Assuming the Lloyds share price valuation remains the same through 2020, if profits grow by 25% as targeted, I calculate the shares could be worth 83p, around 25% above current levels. 

If we throw dividends into the mix, the returns are set to be even higher. Analysts are forecasting a dividend per share of 3.6p for 2018 and 3.7p for 2019 excluding any special distributions. These payouts, plus my estimate of a dividend of 3.8p for 2020 and earnings growth, imply a total return of 43% over the next three years.

In the best case scenario, where shares in Lloyds trade up to the same valuation as those of HSBC, I believe the upside could be as high as 108%.

So overall, based on the bank’s current rate of profitability, future growth plans and peer profitability, it looks to me as if the Lloyds share price is significantly undervalued at current levels.

The post Why I believe the Lloyds share price is far too cheap appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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.

Looking ahead, further volatility may be on the cards. Investors still seem uncertain as to whether to be bullish or bearish, with the end result being a lack of clear direction in the index. However, due to the growth potential on offer within the banking and pharma sectors in particular, the index could enjoy a rise to 8,000 points over the medium term.

Banking stocks

The outlook for the banking sector seems to be relatively bright. While it has not been a popular industry among investors in the past, low valuations suggest that it could now offer wide margins of safety. They could translate into growth potential, with the health of a number of FTSE 100-listed banks having improved dramatically in recent years.

The profitability of the sector could be positively catalysed by rising interest rates. Although inflation may have fallen slightly in the last few months, there remains an appetite among policymakers to raise rates. This could provide more profitable trading conditions for the sector and may lead to greater justification for higher ratings.

Additionally, UK banks are now in the process of generating excess capital. They have largely restructured and repaired their balance sheets, and may now be able to deliver rapidly-rising dividends. As such, they may deliver high capital growth and help to push the FTSE 100 upwards over the medium term.

Pharma stocks

The pharma sector may also have a positive impact on the FTSE 100 in future. Demand for healthcare products across the globe continues to increase, with a rising world population and an ageing one too providing a possible tailwind over the coming years. This could mean that trading conditions for companies across the sector improve, and may mean they can command significantly higher valuations than at present.

The popularity of pharma stocks has declined in recent years. Investors have become less risk-averse and have focused on cyclical companies that offer less downside protection during challenging economic periods. Increased risk-taking has meant that the defensive characteristics of healthcare companies has declined to a large extent.

However, the recent bout of stock market volatility may now attract capital to large-cap pharma stocks due to their relatively low correlation with the wider economy, as well as their solid business models. As such, they could perform well in future and may provide the FTSE 100 with a major catalyst over the coming months. Alongside the upbeat outlook for banking stocks, this could help to push the index towards 8,000 points.

The post Why banking and pharma stocks could drive the FTSE 100 to 8,000 points appeared first on The Twelfth Magpie.

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Valuation

For FY2018, City analysts expect it to generate earnings per share of 73 cents. As a result, at the current share price, HSBC is trading on a forward-looking price-to-earnings (P/E) ratio of 12.7. A general rule of thumb is that a ratio under 15 is seen as good value, so looking at that figure in isolation, it appears that the shares are now fairly cheap.

However, to obtain a relative valuation, we should compare HSBC’s P/E ratio to those of the other UK banks. Do the others offer better value? At present, Barclays and RBS trade on forward P/E ratios of approximately 10, while Lloyds Banking Group has a forward P/E of just 8.3. So, on this metric, HSBC actually looks quite expensive relative to the sector.

It’s a similar story with the price-to-book value (P/B) ratio, which measures the market value of the company’s equity to the book value of its equity. Like the P/E, a lower ratio is better. Currently, HSBC has a P/B of 1.11. In contrast, Barclays, Lloyds and RBS have P/B ratios of 0.55, 0.96 and 0.64 respectively. This indicates that HSBC shares are the most expensive of the four.

Dividend yield

Turning to dividends, HSBC is currently forecast to pay its shareholders 52 cents per share for 2018. At today’s share price, that equates to a strong yield of 5.6%. In contrast, looking at analysts’ estimates, Barclays currently offers a prospective yield of 3.1%, Lloyds also offers a yield of 5.6%, while RBS offers a yield of 2.9%. HSBC currently has the equal-highest yield of the four banks, which is a plus, however, we should also consider dividend growth. 

Looking at its dividend track record, the FTSE 100 bank has had three consecutive payouts of 51 cents per share now, and said in February that it plans to maintain this level for 2018. That’s not ideal, as this means the bank’s dividends are losing purchasing power to inflation.

Meanwhile Lloyds is growing its dividend strongly at present, having now notched up four consecutive increases and recently hiking its FY2017 payout by 20%. If Lloyds can keep lifting its payout in coming years, it could potentially offer a much higher yield than HSBC in the future. Barclays is forecast to raise its dividend by 112% this year, but that’s coming from a low base, as its dividend was cut significantly in 2016. RBS hasn’t paid a dividend for a decade, but is forecast to resume a payout this year.

Is HSBC a bargain?

HSBC shares certainly look more attractive at today’s price than they did earlier in the year when they were trading near 800p. Today’s P/E ratio of 12.7 and prospective yield of 5.6% look quite reasonable, in my opinion. However, investors should be aware that relative to other FTSE 100 banks, the shares still look slightly expensive.

The post Is HSBC a bargain after the recent share price fall? appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.

Rising challenger

Shares of Virgin Money climbed as much as 6% higher in morning trading today after the challenger bank released forecast-beating annual results.

Underlying pre-tax profit of £273m was 28% ahead of the prior year and comfortably exceeded a City consensus of £259m. Underlying earnings per share (EPS) increased 22% to 39.8p versus forecasts of 37.5p. Statutory numbers weren’t much lower than underlying, as excluded costs were relatively small and genuinely one-off. As management noted, the bank is “unburdened by legacy issues.”

Customer balances continued to grow. At the year-end, retail deposit balances stood at £31bn, mortgage balances at £34bn and credit card balances at £3bn. The group is also developing SME and digital banking propositions, which provide additional drivers for future growth.

I like Virgin’s strong balance sheet, “uncompromising focus on asset quality” and very good efficiency metrics, which enabled it to deliver a healthy 14% return on tangible equity for the year. These qualities stand the group in good stead should the UK economy face headwinds. I believe the share price of 279p — representing a 6% discount to book value and seven times earnings — is too cheap to ignore. As such, I rate Virgin a ‘buy’.

No Brexit worries

Concerns about Brexit are doubtless a significant factor in Virgin’s depressed share price. However, the UK economy is not something to bother investors in BGEO, which is the holding company of the JSC Bank of Georgia.

The group released its annual results earlier this month, and performance reflected its leading position in one of Europe’s fastest-growing emerging economies. Strong growth across all its businesses produced a year-on-year increase of 23.7% in revenue and an 11.5% rise in EPS. City forecasts have earnings growth accelerating more than 20% this year, which puts the company on a forward price-to-earnings (P/E) ratio of under nine.

Demerger

BGEO has a significant corporate event in the offing. At a general meeting in April, shareholders will be asked to approve a demerger of the group into two separately London-listed businesses: a banking business, Bank of Georgia Group plc, and an investment business, Georgia Capital plc.

The former will comprise retail banking and payment services, corporate investment banking and wealth management operations, and banking operations in Belarus. The latter will comprise stakes in a number of businesses, including FTSE-listed Georgia Healthcare Group and a number of other plays on Georgia’s fast-growing economy, ranging from utilities and energy to real estate and beverages.

If you’re attracted by the favourable economic backdrop in Georgia you’d probably want to decide whether you’re interested in holding both a banking group and an investment group or whether only one or the other of them appeals to you. If you’re happy to hold both, you may want to consider investing today. If you only want one of them, you could still consider investing today but it would be simpler to wait until after the demerger.

The post 2 banking stocks at incredibly low prices appeared first on The Twelfth Magpie.

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G A Chester 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.