Why Virgin Money Holdings (UK) PLC Looks Set To Trounce HSBC Holdings plc

License: CC0 Public Domain.
License: CC0 Public Domain.

Today's full-year results from Virgin Money (LON: VM) are being well received by the market, with the shares up more than 6% as I write.


Great growth in earnings

Underlying pre-tax profit is up 53% since last year, and the firm reports an array of other positive financial outcomes.

Virgin Money's chief executive says,

"We have performed strongly against our objectives, including delivering market-beating growth in our core mortgages, savings and credit card businesses, maintaining the quality of our balance sheet and delivering a customer satisfaction rating among the highest scoring retail banks in the UK."

Virgin Money's business is flying, which is a great result for the UK government. Britain regulates its banks through the Bank of England's Prudential Regulation Authority (PRA) and one of the PRA's objectives is to facilitate effective competition in Britain's banking market. So, seeing a 'challenger' bank such as Virgin Money growing like mad will delight regulators and politicians, who seem set on seeing power wrested from the clutches of Britain's big banks, such as HSBC (LSE: HSBA) and others.

City analysts following Virgin Money expect earnings to shoot up by 33% during 2016 and by 30% in 2017. That's a cracking rate of growth, which demonstrates the firm is doing a lot right.

A modest valuation?

At today's 361p share price, the firm's forward price-to-earnings (P/E) rating runs at just over 11 for 2016, which seems modest for such growth. Perhaps that's because the recent general market weakness seems to have pulled the share price down. In 2015, the shares traded as high as 450p.

Virgin Money's growth forecasts contrast with those of HSBC. City analysts see the troubled banking giant achieving a 4% uplift in earnings during 2016 and 9% in 2017.

In February, HSBC's chief executive said, "The current economic environment is uncertain, but our diversified banking model, low earnings volatility and strong capital generation give us strength and resilience that will stand us in good stead."

At today's 471p share price, the firm trades on a forward P/E rating of just below 10 for 2016, which is just a smidgeon below fast-growing Virgin Money's. Although sporting a large market capitalisation, HSBC seems to be a business aiming to recover from recent challenges, whereas Virgin Money looks like a growth proposition. The valuations seem close, and that makes Virgin Money seem all the more attractive.

Dividend yields

HSBC's forward dividend yield sits at around 7.6%, with the payout covered about 1.35 times by earnings. At Virgin Money, the yield is just over 1.7% for 2016, and earnings cover the payout more than five times. Such robust cover from earnings reinforces my view that the directors think there is plenty of growth potential left in the business.

I'd rather invest in Virgin Money than HSBC and believe there is a good chance that the firm could trounce total returns available from its larger rival.

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