One FTSE 250 stock that I’ve been watching for a while now is Bank Of Georgia (LSE: BGEO).
This is one of the largest lenders in Georgia, which is one of the fastest-growing economies in Europe. Economic growth in the eastern European country has averaged 5% per annum since 2017 as the government has pursued several free-market initiatives to help the economy prosper.
While a dispute with Russia has weighed on growth recently, policymakers remain optimistic that the country can return to its 5% per annum growth rate. The region is trying to position itself as a transit point in trade between Central Asia and Europe, and so far, the strategy seems to be working.
Bank of Georgia has been riding its home country’s prosperity for the past few years. Net income has grown at a compound annual rate of 18% since 2013 as the bank has consolidated its position in the market and rolled out new products to customers.
Emerging group
Most investors might take one look at Bank Of Georgia and write the company off because of its exposure to the former Soviet state. However, in my opinion, this bank is better than many of its European counterparts.
For example, it has a strong capital position with a tier one capital ratio of 11%, above the minimum level of 9.6%, and for the first half of 2019, the group delivered a return on average equity — a key measure of bank profitability — of 23.7%. Most European banks can only dream of being able to achieve a return on equity of more than 20%. Many are struggling to make 10%.
The main reason why Bank Of Georgia is so profitable is its net interest margin. It’s the difference between what the bank pays depositors and charges borrowers, and financial firms live and die by the net interest margin. On average, UK banks reported a net interest margin of around 3% for 2018. Bank Of Georgia, on the other hand, reported a margin of nearly 7%.
Growth continues
The bank’s expansion is only accelerating in 2019. Today the group reported a 36.9% rise in first-half profit off the back of strong lending at its retail business.
While overall margins were hurt by pricing pressure in the unsecured customer lending market, the company’s investment banking division and asset management division both reported robust growth. Assets under management increased by 25.6% year-on-year and the investment banking net loan book grew by 42.6% year-on-year.
Cheap growth
With some of the best profitability metrics in the European banking industry, you might think that investors are rushing to buy shares in Bank Of Georgia.
That is not the case.
At the time of writing, shares in the group trade at a forward P/E of just 5.1 around half of the European banking sector average. The stock also offers a dividend yield of 6.1%.
While there are always going to be risks investing in an emerging market like Georgia, I think the market is being too pessimistic here. If the bank was based in Western Europe, the stock might command a premium valuation compared to the rest of the sector.
All things considered, I reckon it should be worth at least as much as the rest of the sector. That’s why I think shares in Bank Of Georgia have the potential to double your money.
