I’ll admit it: I’m still not willing to invest in most banks, even seven years after the financial crisis. The sector is too complex, and if some of the world’s top banking analysts can’t understand what makes the world’s largest banks tick, I don’t stand a chance.
Keeping things simple
Simplicity is the name of the game with Lloyds and Bank of Georgia. In contrast to the likes of HSBC, Barclays and RBS, Lloyds and Bank of Georgia don’t have sprawling, uncontrollable investment banking divisions.
Lloyds has worked hard since its October 2008 bail-out to wind down its investment bank and exposure to risky assets. Bank of Georgia doesn’t have an investment banking arm.
Both Lloyds and Bank of Georgia have reverted to a traditional business model. Lending money out at a higher rate than it costs to borrow. This approach means that both banks have a more predictable income stream and are not subject to the peaks and troughs of investment banking.
Bank of Georgia is one of the most exciting companies around.
It is a well-diversified play on a booming emerging economy. Georgian GDP grew by 4.3% year on year during the first quarter of this year, despite a 16.3% increase in the value of the US dollar against the Georgian Lari.
Moreover, Bank of Georgia isn’t just a bank. The group owns assets across Georgia, including hospitals, water, utilities and housing. Georgia Healthcare Group, part of the Bank of Georgia’s investment arm, has a market share of 22%, with 2,140 hospital beds across the country.
The bank’s real-estate business is in place to meet the unsatisfied demand for housing through its well-established branch network and sales force while stimulating mortgage lending.
Seeking high returns
Investments made by Bank of Georgia’s investment division must have 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. So, the bank isn’t willing to make risky or unprofitable investments.
During the first quarter, these three investment divisions amounted to 10% of group revenue, down from 13% in the year-ago period as net banking income surged by 50%.
And Bank of Georgia’s 4×20% plan should ensure that the bank continues to report rapid growth for the foreseeable future. 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% and a 20% per annum growth in customer lending.
With a simplified business model, Lloyds has the potential to become one of the FTSE 100‘s top income stocks.
Indeed, the bank intends to payout 60% to 70% of earnings to investors in the near future. Analysts are predicting that the bank will earn 8.3p per share next year. A payout ratio of 70% would equal a dividend payout of 5.81p per share, a yield of 6.7%.
Bank of Georgia currently supports a dividend yield of 3.8% and trades at a forward P/E of 9.3.
The bottom line
In a complex industry, Lloyds and Bank of Georgia both run simplified business models that are relatively easy to understand.
If you’re looking to invest in the banking sector, then you can’t go wrong with these two industry leaders.
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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.