Investing in the banking sector remains somewhat risky. The global economy faces risks such as policy change by Donald Trump and the effects of Brexit. As such, it would be unsurprising for bank shares to remain volatile during the course of the next two years.
However, the sector also offers low valuations which could equate to high returns. Reporting on Monday morning was a relatively small bank which has recorded a share price rise of 52% in the last year. Looking ahead, a further gain of 20%+ could take place over the next two years.
Mixed results
The company in question is Georgian bank, BGEO (LSE: BGEO). Its 2016 results were somewhat mixed, with an improvement in performance held back by negative currency effects. The Georgian currency, the Lari, declined in value by 10.5% during the year when compared to the US dollar. Further devaluation could take place this year, which may affect the company’s performance. However, with a rise in earnings per share of 31% in 2016, it seems to be performing well on an underlying basis.
Bright future
Over the course of 2017 and 2018, BGEO’s bottom line is forecast to rise by around 31%. Clearly, this is dependent upon a number of factors, including currency changes. However, with the Georgian economy continuing to perform relatively well, there are clear growth opportunities on offer.
Since the company’s shares currently have a price-to-earnings (P/E) ratio of 9, there seems to be significant scope for an upward rerating. And if the forecasts for 2017 and 2018 are met, BGEO could be trading on a P/E ratio of as little as 6.9 by the start of 2019. Therefore, a capital gain of 20% would not be challenging, and could even be achieved if downgrades to guidance are experienced over the medium term.
Diversification
Of course, BGEO lacks diversity when compared to a number of its UK-listed banking peers. It is highly dependent upon the performance of the Georgian economy, which may prove to be less stable than for many developed-world economies over the course of 2017 and beyond.
However, in this sense it is arguably little different than UK challenger banks such as Virgin Money (LSE: VM). It is focused on the UK economy, which itself is at the beginning of a lengthy process to leave the EU. This could lead to a highly uncertain period for Virgin Money, since the prospects for consumers are becoming more challenging as inflation rises. The effect of this on mortgage demand may be negative and lead to downgrades in its financial outlook.
Despite this, Virgin Money is expected to record a rise in its earnings of 24% in the next two years and it trades on a P/E ratio of just 8.9. Therefore, it seems to have a sufficiently wide margin of safety to merit investment. As such, both Virgin and BGEO may be relatively risky buys at the present time, but both could deliver stellar returns by 2019.
