Why I’d ignore Lloyds shares and buy this dirt cheap FTSE 250 bank instead!

I’m looking past Lloyds shares and seeking to buy this low-cost bank when I next have spare cash to invest. I think it could deliver spectacular returns.

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There’s no denying that — on paper at least — the Lloyds Banking Group (LSE:LLOY) share price offers attractive all-round value.

At 41.7p per share, the FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of 5.3 times. It also carries a mighty 6.7% dividend yield.

I’m a keen value investor, but I’m not tempted to buy Lloyds shares for my portfolio.

Okay, the company has one of the most trusted names in the business, which, in turn, helps it to win and retain new customers. But the Black Horse Bank still faces significant risks as the British economy flatlines. Loan growth may disappoint and bad loans may remain well above historical levels.

This is why I’d rather invest my hard-earned cash in TBC Bank Group (LSE:TBCG) instead.

A better buy

The challenge that UK-focused banks face isn’t just a reflection of the tough economic climate. Increasing business is naturally tougher in mature markets like this than in certain overseas countries.

This is one reason why I’d rather invest in Georgia’s TBC Bank. A combination of low financial product penetration and strong economic growth leaves plenty of room for the Eurasian country’s banking industry to expand.

The FTSE 250 company’s latest financials this week illustrate the massive potential here. Net interest income rose 25.7% during the third quarter, to 427.9m Georgian lari (£130m).

Business has been helped by Georgia’s continued economic strength, the country’s GDP expanding by 5.4% between July and September. That’s significantly higher than the 0.6% increase recorded in the UK during that time.

Bright outlook

Demand for credit is soaring, and TBC Bank’s gross loan book leapt 17.3% year on year to stand at 20.4bn lari as of September. This allowed the bank to grow operating profit 4.3% over the period to 615,219 lari.

Encouragingly for the bank, economists are predicting the Georgian economy to keep up its recent impressive momentum. The World Bank, for instance, expects GDP growth to improve from 4.4% this year to 5% in both 2024 and 2025.

TBC’s focus on fast-growing digital banking gives it scope to grow revenues ahead of the broader market too. The number of digital monthly active users on its books surged to 4.5m during the third quarter, from 3.2m a year earlier.

Excellent value

I don’t believe this bright outlook is baked into TBC Bank’s valuation. At £27 per share, the company trades on a forward P/E ratio of 4.5 times. Astonishingly, this is also below the corresponding earnings multiple for Lloyds shares.

I also believe TBC is a more attractive stock based on projected dividends. Its yield of 6.5% for 2023 is behind that of Lloyds. But predictions of sustained dividend growth push the reading to a superior 8.9% by 2025. And predicted dividends are covered by an excellent 3.2 times and 3.4 times through the next three years.

Profits at the bank could suffer if the global economy enters a significant downturn. But, on balance, I think it’s an excellent value stock to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

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