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Why I’d buy Lloyds Banking Group plc over these two banks

Today, I’m looking at the investment case for Lloyds Banking Group (LSE: LLOY), and comparing the business to two smaller rivals.

New kid on the block

Metro Bank (LSE: MTRO) is a newcomer to UK high street banking, and when it opened its doors in 2010, was the first high street bank to open in 100 years. The £3.1bn market cap is placing a strong emphasis on customer service, with its branches open seven days a week, and from 8am to 8pm on weekdays.

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This sounds great in theory, however I’m not so convinced by the investment case. While Metro Bank has seen a strong increase in revenues over the last three years, it is yet to generate a full-year profit.

That could change this year, with City analysts anticipating earnings of 25p per share for the year. At the current share price, that consensus earnings figure places the bank on a forward P/E ratio of a sky-high 140. Add in the fact that Metro does not pay a dividend, and I’m not seeing many reasons to invest in the challenger bank right now.

Emerging market play

A more attractive banking play, in my view, could be BGEO Group (LSE: BGEO), the group formerly known as Bank of Georgia Holdings.

BGEO is the leading retail bank in Georgia, serving 2.1m customers through a network of 273 branches. The group operates through three well-established brands, Express, Bank of Georgia and Solo.

The firm has recorded five straight years of revenue growth, and earnings per share jumped from GEL7.93 to GEL10.41 last year, a rise of 31%. Half-year results released this morning show the momentum continuing, with profit before tax rising 68.3%, and basic earnings per share rising 25.6% to GEL5.74. 

Of course, Georgia is very much a developing country, and investing in smaller emerging markets comes with its own set of risks. Fluctuations in exchange rates can also affect profitability in GBP terms. On a forward P/E of just 8.6, the bank’s valuation does not look overly demanding though, and a forecast dividend yield of 3.4% adds weight to the investment thesis.

The black horse

However, when all is said and done, I’d pick Lloyds Banking Group over Metro and BGEO.

Lloyds is far from perfect, having struggled through a considerable rough patch in recent years. However, things do now appear to be turning around slowly. Recent half-year results saw underlying profit rise 8% to £4.5bn, and while earnings per share dipped marginally, the bank raised its interim dividend by an impressive 18%. Management stated “as a simple, low risk, UK-focused bank we are well placed to continue to help Britain prosper.”

City analysts forecast full-year earnings of 7.7p this year, placing the stock on a forward P/E ratio of 8.5, and dividends of 4.02p per share are expected, although this level of payout is far from guaranteed.

On the bear side, Lloyds is highly exposed to the fortunes of the UK economy, and the bank is still dealing with conduct charges as well, recently forking out another £1bn related primarily to PPI charges.

However, Lloyds definitely appears to be heading in the right direction, and as such, I’m cautiously optimistic about the bank’s long-term investment prospects.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.