Not many investors would look twice at BGEO Group (LSE: BGEO), the holding company for Bank of Georgia, but given the sorry state of the UK’s large lenders that could be a huge mistake. On nearly any performance metric, the small Caucasian bank trounces its UK rivals and shares have increased in value 83% since their IPO, while the FTSE 350 Banking Index is down over 20% in the same period.
First and foremost, it must be said that investing in a Georgian bank may not be for every investor, but the country is growing quickly, thoroughly Western-oriented and scores well on nearly every global ranking of business friendliness. Bank of Georgia, the largest bank in the country, has taken advantage of rapid economic development and boosted revenues by 36% and earnings per share by 18% over the past year alone.
Alongside capturing the largest share of a fast-growing market, the company has focused assiduously on keeping operating costs low. The bank’s cost/income ratio is a very low 35.7%, and this number has improved by 13.5% since going public in 2012. This led to return on equity (RoE), a key metric for bank performance, of an astounding 21.7% in the past year.
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As revenue has risen dramatically, the company has returned significant cash to shareholders. Full year 2015 dividends have yet to be finalised but management expects them to yield a solid 3.6%, which will be covered more than three times by earnings.
All this good news has been well received by investors, and shares trade at a 1.28 price/book ratio, showing investors have already priced-in significant growth in the future. However, I believe for more risk-tolerant investors BGEO may offer higher, and more likely, growth prospects than many of the largest UK banks.
Big questions for Barclays
As BGEO has been on the upswing, Barclays (LSE: BARC) has been stuck in the doldrums for the past eight years. Although new CEO Jes Staley is moving to rein-in high costs and shift the bank’s focus to core sectors, the market hasn’t responded positively.
Staley’s plan to sell the bank’s sprawling African operations is a wise one, but it may not be enough to return the bank to the level of profits it once brought in. This is largely due to the fact that management is keeping the underperforming investment bank. This division, largely a legacy of the Lehman Brothers purchase in 2008, has a very low RoE of 5.6%.
This compares to solid RoEs of 17.7% for the credit card arm and 12.1% for retail banking. The question then becomes why management is intent on retaining an expensive, low profit investment bank that brings in lower returns with higher risk than other divisions. With share prices off 35% since Staley was announced as the new CEO, some in the City obviously share these and other concerns.
A price/book ratio of 0.43 could be interpreted one of two ways. A positive view would be that there’s significant growth possible for shares. A more negative view is that shareholders would be better off if the bank were broken up and assets returned to shareholders. While this may be a bridge too far, I do believe that until the underperforming investment bank is finally cut loose, share prices will continue to flounder.
