Attractive-looking valuation

CYBG proposes that Virgin Money shareholders will receive 1.1297  CYBG shares for each Virgin Money share they hold if the deal goes through, which will leave them owning around 36.5% of the combined company. According to the rules of The City Code on Takeovers and Mergers, CYBG now has until 5 pm on 4 June to announce whether it will or will not make a firm offer for the business. In the meantime, Virgin Money’s directors are considering the proposal and have advised shareholders to take no action for the time being. Indeed, it could all come to nothing, or CYBG may have to put in a higher offer before Virgin’s directors are happy to recommend the proposals.

Even after today’s rise in the share price, it’s hard to make a case for Virgin Money being over-valued. At 338p, the forward price-to-earnings rating for 2019 sits at 9.7 and the forward dividend yield is around 2% with anticipated forward earnings likely to cover the payment a healthy-looking five times. The price-to-book ratio is close to 0.76. Ignoring cyclical uncertainties for a moment, Virgin Money’s valuation seems undemanding from several angles.

A good deal or assets plundered?

CYBG thinks the proposed deal will be good for Virgin Money shareholders, giving them an “attractive” premium at the beginning and the “opportunity to participate in the continuing progress of the combined group.” CYBG’s directors talk about potential synergy benefits from combining the two firms but the real prize seems to be what they call the “strength and appeal” of the Virgin Money brand, which would “play a significant role in the combined group.”

Maybe from a business perspective, this is a good idea. CYBG reckons the enlarged company would create the UK’s “leading” challenger bank offering full-service banking to 6 million personal and business customers. An organisation that size could go on to gain yet more traction in the market, winning business from the old dinosaur institutions such as Lloyds, Barclays, Royal Bank of Scotland and HSBC in Britain.

From an investing perspective, I think the situation is tricky. In the longer term, an enlarged company could do well and an investment in Virgin Money could work out well too. However, there is no certainty that any deal will go through and if it fails, the shares could slip back down again from today’s elevated level. Another possibility is that a higher offer materialises, either from CYBG or from another company, which could drive the share price even higher in the short term. Overlaying it all is the cyclicality of the banking sector, which I see as a good reason for low valuations right now. On balance, I’m cautious and would not bet the farm on Virgin Money now.

The post Should I buy shares in Virgin Money Holdings, up 8% today on takeover offer? appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

If you’re investing for the long term, I reckon there are two key things to look for in a dividend, strong cover by earnings and a history of progressive annual rises.

Challenger bank

Virgin Money Holdings (LSE: VM) has only been a listed company since November 2014, so its track record is relatively short. But since its first dividend in 2015, of a modest 4.5p for a 1.2% yield, it’s been growing well ahead of inflation.

A 13% hike in 2016 followed by a further 17% last year took the yield to 2.1%. And though that initial rate of growth can’t be expected to continue, analysts are still forecasting a 6% uplift this year followed by another 9% in 2019. That would bring the yield up to 2.6%.

That’s clearly well ahead of inflation, but is Virgin Money likely to maintain this impressive start and get actual yields up to something decent? I think so, for several reasons.

Firstly, in these early days the bank’s dividend policy has been very conservative, with 2018’s expected payment more than six times covered by earnings. By contrast, Lloyds Banking Group has a predicted 5.3% yield, around twice covered, and Barclays‘ 3.1% would be covered three times.

If Virgin were to go for cover of three times this year, we’d be looking at dividend yields of 4.4%, with twice cover yielding 6.6%. But right now, the cash is better spent on growing the business.

This year is off to a strong start, with first-quarter gross mortgage lending of £1.4bn and net lending of £0.2bn in line with expectations. Retail deposits are doing better than expected, and overall full-year guidance has been confirmed.

Chief executive Jayne-Anne Gadhia spoke of “10.4% year-on-year growth in our mortgage book,” and that’s from a small bank in a big market with plenty of room for further growth.

Decades of growth

If you’re looking for a terrific long-term record, they don’t come much better than my second pick, RPC Group (LSE: RPC).

One of the world’s leading suppliers of rigid plastics packaging and plastic containers, RPC has upped its annual dividend for 25 years in a row. And with forecasts suggesting further earnings growth, analysts are expecting serious inflation-busting dividend rises of 15% this year and 9% annually for the following two years.

If that proves accurate, this year’s mooted 3.4% yield would climb to 4.1% by 2020, with dividends covered around 2.5 times by earnings.

On top of these attractive dividends, RPC has been handing back further cash to shareholders via a £100m share buyback programme since July 2017. It hasn’t actually made much difference to the share price in a year, but it is up 160% over five years. And the shares are trading on what I see as a very tempting P/E multiple of 11.3, dropping to 9.9 on 2020 forecasts.

Again, this year is looking good so far, after March’s trading update told us the “positive trading trends outlined in the third quarter update have continued, and revenue for the full year is expected to have grown significantly versus last year.“

The post 2 FTSE 250 stocks with soaring dividends I’d buy with £2,000 today appeared first on The Twelfth Magpie.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, and RPC 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.

Today I’m looking at two out-of-favour stocks that are trading 20% or more below their 52-week highs. Both have turnaround potential in my opinion.

WPP

Advertising giant WPP (LSE: WPP) is a favourite company of mine. While advertising is a cyclical industry, WPP has an outstanding track record of revenue and profit growth, as well as a fantastic dividend growth history.

Over the last five years, revenue has grown from £10bn to £14.4bn and net profit has increased from £840m to £1,400m. Meanwhile, the dividend has been hiked from 24.6p to 56.6p per share, as the company has lifted its payout ratio.

2017 has been a poor year for advertising-related companies. Due to political and economic uncertainty, many companies have slashed their advertising budgets. WPP has suffered. Revenue this year is expected to fall to £13.2bn.

As a result, the shares have been sold down significantly. Trading above 1,900p in March, the shares fell to around 1,250p in November, although they’ve since rebounded to around 1,350p. At that price, I see long-term value on offer. Here’s why.

While advertising conditions may remain challenging in the short term, events next year such as the World Cup and the Winter Olympics may provide a boost. In the long term, WPP’s exposure to digital advertising (40% of revenues) and fast-growing markets such as China and India, provides an opportunity for growth. It stated in October that it remains well positioned to deliver on long-term targets, which include headline diluted EPS growth of 10% to 15% per year.

The recent share price fall enables investors to pick up the shares at a low forward P/E ratio of just 11.2. That looks cheap. Given that the company is buying back its own shares (396m in the first nine months of 2017), management clearly believes the shares are cheap too.

The yield also looks very attractive. A projected payout of 60.5p this year equates to a yield of 4.5% at the current share price. That distribution is expected to be covered twice by earnings and is also expected to grow in FY2018. Overall, I believe WPP offers excellent turnaround potential from here.

Virgin Money Holdings

Another stock that I think could rebound is Virgin Money Holdings (LSE: VM).

The challenger bank has seen its share price fall from 350p in February to around 280p today. Brexit uncertainty and lower growth forecasts have taken their toll on the company. Yet at the current valuation, I believe the shares look cheap.

For FY2017, analysts expect revenue and net profit growth of 12% and 17% respectively. The dividend is forecast to be lifted 12%, which takes the prospective yield above 2%. Analysts expect a further dividend hike of 10% for FY2018. Any company growing its dividend at that kind of rate warrants closer inspection, in my opinion.

Rival challenger bank Aldermore was recently snapped up at a valuation of around 10 times this year’s earnings. As a result, I believe Virgin’s forward P/E of 7.6 looks too cheap.

The post Two turnaround stocks for 2018 appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in WPP and Aldermore. 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.

Whether there’s any further action against RBS as a result remains to be seen. But after years in the wilderness, the bank does finally look to me to be worth investing in again.

So far I’ve kept well away from RBS as it has lagged some way behind my preferred Lloyds Banking Group in the recovery stakes. In fact, over the past five years, RBS shares have lost 1% in value, way behind the 54% rise in Lloyds’ shares and with the dividend still not restored — payouts at Lloyds resumed in 2014 and reached 4.1% last year.

Dividend coming back

But we should have at least a tiny dividend from RBS this year, followed by a yield of 3.2% next year, if analysts are to be believed. And with those mooted payments very well covered by forecast earnings, if RBS were to get anywhere near Lloyds’ payout ratio, I could easily see rises to 6% or more in the next few years.

Despite 2016’s full-year loss, RBS reported a first-half adjusted operating profit of £3bn this year, with adjusted earnings per share (EPS) of 16.3p, which suggests it’s finally heading in the right direction. 

Liquidity looks fine too, with a CET 1 ratio of 14.8% coming in comfortably ahead of the bank’s target of 13%.

With a forward P/E of 11.4, dropping to 10.5 for 2018, RBS shares look worth buying to me.

Upstart challenger

I also like the look of some of our so-called challenger banks, with Virgin Money Holdings (LSE: VM) probably my favourite.

Its shares soared when the bank was launched, reaching a peak of over 450p in mid 2015. But the economic events since, including the Brexit vote and weakening growth forecasts, have taken their toll — and as I write, the price is down to 302p.

But for me, that turns a bank that was already looking like a good long-term buy into a screaming bargain. Last year saw a 28% rise in EPS and a dividend yield of 1.7% — not cash cow territory just yet, but nearly six times covered by earnings and pretty good at this stage.

Forecasts suggest 24% and 6% EPS rises this year and next, dropping the P/E as low as 7.4 on 2018 forecasts (after 7.8 for the end of this year).

Steady progress

A third-quarter update on Tuesday affirmed the company’s full-year guidance, reporting gross mortgage lending of £6.5bn, net mortgage lending of £3.2bn (for a very impressive 10% market share), and credit card balances of £2.9bn. 

There are three key things I like about Virgin Money, in addition to the low valuation of the shares. Firstly, there are no legacy problems of the kind faced by the big banks, because Virgin simply wasn’t around to share in their misdeeds.

Then there’s the focus on UK retail business rather than higher-risk investment banking and international operations, which should provide a safety barrier. Finally, Virgin is still a small fish in a big pond, and it should find it easier than the big banks to grow its market share.

Growth, plus long-term dividend potential — that’s what I see.

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Alan Oscroft owns shares in Lloyds Banking Group. 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.

Lloyds Banking Group (LSE: LLOY) is no doubt a popular banking share in the UK. In fact, the stock is regularly the most traded stock across the whole market, let alone the banking sector. After years of poor profitability, Lloyds’ prospects are definitely looking up.  

Having said that, Lloyds isn’t the only UK bank that looks to offer investment potential right now. Many of the challenger banks are trading at very attractive valuations. Could these stocks outperform Lloyds in the long run?

Aldermore Group

With a market cap of £770m, Aldermore Group (LSE: ALD) is a much smaller outfit than Lloyds. However, smaller companies can provide excellent growth opportunities and this is a bank that is growing at an impressive rate.

Over the last two years, revenue and net profit at the challenger bank have surged from £175m and £38m, to £278 and £94m, and City analysts expect growth of 10% and 9% respectively this year. Earnings per share of 29.4p are forecast for FY2017, placing the bank on a forward looking P/E ratio of just 7.6. By contrast, Lloyds trades on a forward looking P/E ratio of 9.2.

Aldermore is expected to pay a maiden dividend this year, with analysts pencilling in a payout of 3.75p per share at present. That equates to a yield of 1.7%, which is lower than Lloyds’ yield however, the payout is forecast to grow significantly in coming years.

In its full-year results in March, Aldermore stated that Britain’s exit from the EU was unlikely to have “any material impact” and that the loan book should grow between 10%-15% this year. It went on to say that it expects to deliver a return on equity in the high teens over the medium term. An update in May stated: “Aldermore has made an excellent start to the year, with continued strong progress on our strategic priorities and financial performance ahead of our expectations.”

The next update from the bank is interim results on 10 August. This is one to watch closely in my opinion.

Virgin Money Holdings

Also offering value in the challenger bank space is Virgin Money Holdings (LSE: VM), provider of residential mortgages, savings, credit cards and currency products.

Like Aldermore, Virgin Money has recorded impressive growth in recent years with revenue and net profit surging 13% and 26% respectively last year. City analysts have forecast growth of 12% and 13% for FY2017.

The £1.35bn market cap bank released its interim results this morning and while underlying profit before tax surged 26% to £128.6m, the market wasn’t impressed with the bank’s net income margin of 1.59% and slightly lower net interest margin guidance for the full year. As I write, the shares are down 7%.

However, the challenger bank did enjoy a 7% rise in customer loan balances and a decrease in the cost-to-income ratio to 53.9% from 58.8% last year. Impressively, the interim dividend was boosted a significant 19% to 1.9p. Chief executive Jayne-Anne Gadhia stated: “We will continue to drive growth, quality and returns, put customers at the heart of everything we do, and we remain on track to sustain a solid double-digit return on tangible equity (RoTE) in 2017.”

After the 7% fall today, Virgin Money Holdings now trades on a forward looking P/E ratio of just eight. For patient long-term investors, I believe the fall could be a good opportunity to buy the shares at an attractive valuation.

The post Are these banks better long-term buys than Lloyds Banking Group plc? appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Aldermore Group. 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.

Metro men

Metro Bank (LSE: MTRO) floated in March 2016 at £20 a share and today trades at £37.16, an increase of around 85%. This is partly down to global factors: Metro was forced to cut its float price from £24 due to global market turbulence, and has cashed in as stock markets recovered across the board. But it also has plenty to be proud of.

Earlier this month, Metro revealed that it now has a million customer accounts, less than seven years since launch. Targeting superior levels of service and convenience has proved a successful strategy, with 91% of its retail and business customers saying they would recommend the bank to a friend. Not everybody is willing to pay extra for superior service, but clearly, plenty of people are.

Personal touch

The FTSE 250 bank now has 48 stores across the UK with another 10 planned this year, and first achieved profitability in the second half of 2016. This year it expects to see its first full year of profitability. Recent Q1 results showed record growth in deposits, which exceeded £1bn for the first time, while lending rose 11% to £6.5bn and it also attracted 72,000 new accounts. 

Some carped at the dip in net margins to from 2.03% to 2.02% over the quarter, although that still marked an increase from 1.96% a year earlier. These are impressive results and Metro’s market cap is now pushing £3bn. My concern is that there are only so many people who want the personal touch Metro offers, which could put a lid on growth, while Brexit could prove a burden if the economy continues to slow. But forecast earnings per share (EPS) growth of 130% in the year to 31 December 2018 looks compelling.

Virgin territory

Recent share price performance at Virgin Money Holdings (LSE: VM) is less compelling. It is down almost 10% over the last 12 months, to today’s 308p. In fact it is only slightly higher than it was in November 2014, when the shares debuted at 283p. However, there could be a value opportunity here, with the share price valued at just 10.15 times earnings.

That is despite a promising first quarter update last month, with the bank claiming continued “strong progress” as gross mortgage lending hit £2bn, taking its market share to 3.4%. Net mortgage lending of £900m gives it a market share of 12.3%. Credit card balances were 8% higher at £2.65bn and deposits were up 3% to nearly £29bn. Customer satisfaction was also high.

Room to grow

This followed a strong 2016, with the FTSE 250 company reporting a 33% jump in pre-tax profit. Forecast EPS growth of 17% this year and 13% in 2018 looks promising, while a forecast yield of 2.4% shows progression. Perhaps investors are nervous about its proposed takeover bid for Co-operative Bank.

Today’s low rating is largely down to the Brexit effect, with Virgin’s share price destroyed the day after the referendum, and still vulnerable. That aside, this looks like another banking bargain.

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Harvey Jones has no position in any 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.

But one firm shines like a beacon of light across the heaving quagmire that is the banking sector on the London stock exchange, and that company is Virgin Money Holdings (LSE: VM).

Sound progress

In a trading statement released today, Virgin Money revealed sound progress in its British retail banking business. Mortgage balances are up 3% compared to three months ago, credit card balances elevated 8% and deposit balances lifted 3%. The firm continues to win over customers and is building market share.

Chief executive Jayne-Anne Gadhia puts the ongoing operational momentum down to the firm’s “customer-focused strategy of growth, quality and returns,” asserting that the company’s good results demonstrate the benefits of a low-risk business model, strong balance sheet and a focus on operational excellence.

Something is going right for sure because City analysts following the firm expect earnings to shoot up 17% this year and 13% during 2018, which trounces the likes of Lloyds. Both firms compete for the same customers and offer similar services. It looks like Virgin Money is winning.

Outlook and valuation

There’s no doubt that the UK banking market is competitive, but Virgin Money is confident that it can deliver against expectations for 2017 and today reaffirms its guidance for the full year.

With double-digit percentage earnings growth expectations on the table, we might expect a double-digit valuation. However, at today’s share price around 325p, Virgin Money trades with a forward price-to-earnings (P/E) ratio of just over eight for 2018, and the forward dividend yield runs at almost 2.4%.

Those anticipated forward earnings should cover the dividend payout around five times, which looks healthy. With high cover from earnings like that the directors must see plenty of opportunity for further growth, otherwise they would likely put more of the firm’s incoming cash flow into the dividend rather than investing more money in the business.

Out of kilter?

Meanwhile, at today’s share price of 67p, Lloyds Banking Group’s forward P/E ratio runs at 9.6 for 2018 and the forward dividend yield at around 6.2%. Anticipated earnings should cover the dividend payout just under 1.7 times. With so much cash inflow going into the dividend, my assumption is that the directors see little opportunity to invest for growth.

Lloyds’ price-to-book ratio sits around 0.98 and Virgin Money’s at 0.86 or so. Despite all the earnings growth that Virgin Money expects, the firm’s valuation is lower than Lloyds in terms of the forward P/E ratio and when comparing share prices to asset values.

All banking businesses are cyclical and can suffer from valuation-compression as the wider economic cycle unfolds and after a long period of strong earnings. Yet Virgin Money is growing and gaining market share, and I don’t think it deserves to be priced lower than Lloyds, which has a chequered history and an arguably less entrepreneurial culture.

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Kevin Godbold has no position in any 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.

Challenging times

Tesco is a big fish in groceries but small fry in the UK banking sector, with just 136,000 current accounts in total, a fraction of the estimated 68m active UK current accounts. Tesco is one of the new breed of challenger banks facing up to the big four of Barclays, Lloyds Banking Group, HSBC and RBS/NatWest. Names you may have heard of include Aldermore Bank, Atom Bank, Metro Bank, OneSavingsBank, Shawbrook and Virgin Money and there are plenty more starting up all the time. Personally, I’ve lost track.

Some investors have been snapping up shares in these banks, seeing them as a more exciting growth alternative to the stricken big boys. So far, performance has been mixed. Virgin Money (LSE: VM), which listed almost exactly one year ago, is down 16% in that time yet it isn’t particularly cheap, trading at 14 times earnings and yielding about 1.4%. However, it does now boast 3% of the UK mortgage market, and is growing fast in the credit card market as well. 

Mixed bag of banks

OneSavings Bank (LSE: OSB) floated at the same time and is down 26% since then, although it’s slowly heading in the right direction, with underlying loan growth of 13% for the nine months to September 2016. It currently trades at 8.17 times earnings and yields 3%. Metro Bank (LSE: MTRO), which floated in February, was forced to cut the price of its initial offering by 17%, from £24 to £20 a share, but at least this worked in favour of investors. It has rebounded strongly from its post-Brexit dip and today trades at around £27.47, a rise of around 37%. It recently posted its first ever quarterly profit of £600,000, against a £3.4m loss in Q3 last year, with revenue surging 78% to £53.4m.

The challenger banks face an uphill struggle establishing themselves as credible alternatives to the high street giants. The first problem is customer inertia. The current account switch service now allows people to move all their banking services within seven working days, yet take-up has been relatively disappointing since launch in September 2013. Although 567,677 bank switches took place in the first half of this year, that’s less than 1% of total UK current accounts.

Switched off

For the record, Halifax and Nationwide have been the biggest beneficiaries, with Barclays the biggest loser. So even when people do switch, there is no guarantee they will move to a challenger. Attempts by the Competition & Markets Authority to open up the sextort to further competition have been underwhelming.

The other big problem the challenger banks face is credibility. Many people simply don’t trust their savings to these little-known entities, even though they have the same £75,000 protection from the Financial Services Compensation Scheme. Unfortunately, the Tesco hack could make them even more wary. Although Tesco has pledged to reimburse customers for any losses, con Sumer she know they’re vulnerable. Rightly or wrongly, they may feel safer with the big boys. For me and many like me, challenger banks are a challenge too far.

The post Tesco plc hackers threaten the challenger banks appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays 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.

Well, you could buy them on a contrarian basis, on the grounds that pessimistic share price slumps are usually overdone. Or you could invest in banks that should be relatively safe from Brexit.

A nice turnaround

Standard Chartered (LSE: STAN) is due to bring us a third quarter update on 1 November, and the bank’s shareholders have enjoyed a pretty good 2016 so far — since a low point on 11 February, Standard Chartered shares have climbed by 82% to 715p. And although there was a dip in the immediate aftermath of the Brexit result, it was quickly reversed and the price is now up 22% since referendum day.

The surge was due to a number of reasons, including the fall in the value of the pound — Standard Chartered’s earnings are international and are recorded in dollars, so they’re now worth more in Sterling terms. The receding of fears over a hard Chinese slowdown has helped too, with that country recording an annual growth rate of 6.7% for three consecutive quarters.

But on top of those external forces, Standard Chartered finally listened to the lengthy complaints from major shareholders and, following a top-level management shakeup, confidence has been returning.

The downside I see now, however, is that we’re looking at relatively high P/E valuations. It’s not very meaningful for this turnaround year of 2016, but even a strong growth in earnings per share forecast for 2017 would still give us a toppy P/E of over 17.

But it would only need one further year of decent growth for that to come down a lot, and Standard Chartered is nowhere near back up to pre-slump levels yet. And the dividend should be creeping back too — there’s a yield of only 2% on the cards for 2017, but that’s a good start

Challenger

Another way of beating a Brexit banking downturn would be to buy shares in Virgin Money (LSE: VM), which does 100% of its business within the UK’s retail banking industry and doesn’t depend on any EU-wide access.

Virgin is also due to bring us a Q3 update on Tuesday, and at the interim stage things were looking good. A 53% rise in underlying pre-tax profit was impressive, but what counts more for the longer term is the inroads that Virgin is making into the lending markets. Gross mortgage lending for the half rose by 19% to £4.3bn, and that represents a market share of a pretty modest 3.6% based on May figures.

Credit card balances climbed 31% to £2.1bn, with retail deposits 8% up at £27.1bn.

Those are good signs, but they only represent a small proportion of a very large market, and I could easily see Virgin doubling its share of the mortgage and credit card markets in the next few years.

The shares have gained a modest 16% since flotation, rising to 337p, and that gives us a forward P/E of a little under 11 for this year, dropping below 10 on 2017 forecasts — and with Virgin Money’s growth potential, I think that looks cheap.

The post Should you buy Standard Chartered and Virgin Money ahead of results? appeared first on The Twelfth Magpie.

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

Extra cash

While dividends at the big banks are coming under pressure, Arbuthnot Banking Group (LSE: ARBB) has today announced a special dividend of £3 per share to be paid on 18 November — but you’ll have to be on the shareholders register by 21 October.

The first half of the year saw the sale of Everyday Loans and of a 33% stake in the firm’s Secure Trust Bank, netting a total gain of £217m — and a total first-half profit of £225m. Some £45m of that will be used to fund the latest dividend, which comes on top of a 25p per share payment announced at the interim stage and paid in July.

More of the cash is to be used to accelerate the firm’s expansion, with new premises opening in Manchester and an expectation of having “a further six commercial bankers in place by early 2017.” The “disruption in the larger UK banks” has apparently led some top experts to head in Arbuthnot’s direction.

The firm will see a short-term fall in its net interest margin after the base rate was cut, and the longer term is uncertain, but is Arbuthnot a good buy? Despite a sharp fall after the referendum, the shares have regained their loss to reach 1,648p. With earnings erratic in the short term, fundamental valuations are hard to follow and we’re looking at a 2017 P/E of well over 20 — but the firm’s cash generation and dividends do look tempting.

The new kid

Or how about newer challenger Virgin Money Holdings (LSE: VM)? Unlike the big banks, Virgin isn’t saddled with bad debts accrued during the banking crisis, isn’t constantly looking over its shoulder for regulators wielding notices of fines, and doesn’t twitch every time the phone rings in case it’s yet another PPI claim.

Virgin’s share price tumbled in the days after the Brexit vote, but a steady recovery to today’s 310p leaves it down just 15% overall — and that gives us a forward P/E for this year of 10, dropping to a little over nine on 2017 forecasts. Dividends are low with yields of only around 2% predicted, but they’re strongly progressive, with rises of 18% and 22% on the cards for this year and next, and they’d be very well covered by earnings.

As a small fish in a big pond, Virgin Money has the potential to grow very quickly in the next few years. And the bank’s targeting of the UK mortgage market is a strategy that I think has success ahead of it — at the halfway stage this year, gross mortgage lending was up 19% on the first half of 2015, to £4.3bn, with net lending in the half up 29%.

Credit card and retail deposit balances were both on the way up too, growing 31% and 8% respectively, and in the month after the referendum the bank had seen “no evidence of changes in customer behaviour.“

I like the look of Arbuthnot for the long term, but I like Virgin Money better.

The post Is this the best niche bank after special dividend announced? appeared first on The Twelfth Magpie.

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