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Why It May Be Time To Sell Standard Chartered PLC And Buy Bank of Georgia Holdings PLC

Standard Chartered (LSE: STAN) hit a five-year low this week, after City analysts warned once again that the bank could be planning a dividend cut, or even rights issue.

These new, dismal forecasts have been driven by the recent sell-off in commodities, as around 20% of Standard’s total loan book is linked to the commodity market. 

Indeed, Standard’s has $61bn of loans on its balance sheet linked to commodities, which is roughly 140% of tangible net worth. Analysts expect around 7% of these loans to turn bad, indicating that the bank will have to raise an additional $4.4bn in capital to maintain its financial position. 

Emerging market growth 

Standard used to be the best bank in London to profit from emerging market growth. Since 2007 the bank has doubled lending to customers, in order to benefit from economic growth across Asia and Africa. However, it seems as if this rapid expansion is coming back to haunt management, now growth is slowing across Asia and defaults are rising. 

The total value of impairment charges — or bad debts — reported by Standard jumped to $539m during the third quarter, more than double the figure reported for the same period a year ago. Total impairments for the year to the end of the third quarter hit $1.6bn and operating profit for the quarter fell 16% year on year.

To counter rising losses, the bank is slashing up to 4,000 jobs and closing loss-making businesses but it remains to be seen if this will be enough. Nevertheless, one thing is for sure, Standard’s period of rapid growth has come to a sudden halt. 

As Standard Chartered flounders, there’s another emerging market bank that looks to be a better pick: Bank of Georgia (LSE: BGEO)

Room for growth 

Georgia is rapidly becoming the place to do business. Georgia now ranks eighth on the World Bank’s Ease of Doing Business Index. That’s better than the UK, which ranks tenth. Additionally, the country’s economy is growing at a solid 6% to 6.5% per annum and this is expected to continue until 2017.  Unemployment is high at 14.6%, although this is below the peak unemployment level of 17% reported after the financial crisis. 

Still, it’s clear that Georgia is an attractive region to do business and the Bank of Georgia is seeking to capitalise on this.

The bank is more of a holding company than anything else. Indeed, along with banking assets, the group also owns a minority interest in Georgian Global Utilities Limited and a hospital business. 

What’s more, the group is seeking to make other investments within Georgia. However, according to management the group will only consider investing if the investment has a minimum internal rate of return of 20% per annum, with the possibility of a full, or partial exit within a maximum of six years.  

This is all part of the bank’s new 4×20% plan. Simply put, this plan outlines management’s strategy to achieve a consistent return on equity of 20% per annum, a tier one capital ratio of at least 20%, a 20% per annum growth in customer lending and an IRR of 20% on any investments made.

These targets have helped the bank double net income over the past five years. Over the same period return on risk weighted assets has expanded from 2.3% to 4% and the bank’s tier one ratio, or financial cushion has increased to 22.7%.

The bottom line

All in all, as Standard struggles with a rising number of defaults across Asia and a lower-than-average capital cushion, the bank’s future is uncertain. On the other hand, Bank of Georgia is still growing rapidly, the bank is well capitalized and there’s room for further growth. 

To me, Bank of Georgia seems to be the better pick. 

Up to you

Only you can decide if Bank of Georgia is suitable for your portfolio. 

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