Barclays’ (LSE: BARC) outlook is improving and investors seem to be excited about the bank’s prospects. Indeed, year to date Barclays’ shares have outperformed the FTSE 100 by around 9%.
However, challenger banks Shawbrook (LSE: SHAW) and OneSavings (LSE: OSB) have notched up an even more impressive performance. So far this year the two challengers have racked up gains of 23% and 48% respectively.
And there are three key reasons why this performance could be set to continue.
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Simple is best
The banking sector’s increasing complexity is a key concern for the industry’s analysts. It has now become extremely difficult to understand and interpret the balance sheets of large financial institutions’. Even some of the world’s largest accounting firms and top City analysts have stated that banks are just becoming too complicated to understand.
Barclays is no exception.
Barclays’ annual report now weighs in at a staggering 444 pages. The majority of the report is devoted to explaining the risks at the group’s investment bank, as well as the group’s exposure to exotic financial instruments.
On the other hand, OneSavings and Shawbrook are very easy to understand.
Looking through OneSavings’ annual report, it’s easy to see how the company’s business works. There are around 20 pages of financial statements and the bank breaks down its loan book so investors can assess how much risk the lender is taking on.
Similarly, Shawbrook’s annual report only extends to 70 pages. It’s easy to see that at the end of 2013 the group had taken £1.46bn of customer deposits, lent out £1.35bn, and had cash of £207m.
The customer is always right
As part of its drive to cut costs, Barclays is overhauling many of its local branches. Counters are being removed and staff are being replaced by computers, which is alienating many of the bank’s customers.
Luckily, for the likes of Shawbrook and OneSavings, this hands-off approach is pushing customers away from Barclays towards challenger banks that still place value on the client experience.
Shawbrook is focused on lending to the small and medium sized business that has been turned down by traditional high street lenders. And since being set up during 2011, the bank has lent money to more than 60,000 SME’s and consumers.
This approach attracted £1.4bn of new loans for the bank last year as UK businesses and consumers become more confident about trying new lenders. Shawbrook’s profit for the period jumped 192%.
OneSavings’ speciality is mortgage lending, but the bank also targets SME’s. Targeting these two specialist sections of the market, with a different approach to mainstream lenders has helped the group triple pre-tax profits since 2013.
Flexible model
The third and final reason why Shawbrook and OneSavings are better picks than Barclays is their flexibility.
Specifically, the two banks can adapt and change to market conditions faster than their larger, lumbering peer. The figures reveal all.
Last year, Barclays’ return on equity — a key measure of bank profitability — was reported as 9.2%. The bank’s global footprint and complex business, which has become bogged down in regulation held down returns.
However, OneSavings and Shawbrook, both of which are smaller, and able to adjust quickly to changing consumer habits reported an ROE of 31% and 20% respectively for the same period.
