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Why I’d sell Barclays plc to buy this hidden banking stock

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Barclays (LSE: BARC) just can’t seem to do anything right. Even 10 years after the financial crisis the bank is still being reprimanded by regulators, holding back its overall recovery.

The latest attack involves its emergency fundraising in the financial crisis. In 2008, Barclays took a £12bn loan from Qatar to avoid it seeking a UK government bailout. As part of this deal, the bank lent £2.3bn to Qatar Holdings, which the Serious Fraud Office claims was a special favour to help Qatar stump up the bailout cash — against the law if true. 

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The SFO has already charged Barclays plc (the group holding company) and four executives with conspiracy to commit fraud, but now it is going after Barclays Bank, the operating company. If found guilty, it could mean that the entire group is stripped of its operating banking licence. While I believe that it is unlikely the SFO will shut down one of the UK’s largest companies, this is just the latest example of the bank’s continual struggle to recover from the financial crisis. That being said, the group has made enormous progress over the past 10 years streamlining its operations and disposing of non-core, as well as toxic assets. 

However, despite these actions, due to caution surrounding the group’s outlook, the shares still trade at a near to 40% discount tangible book value and a forward P/E of less than 10. But while this valuation might look attractive, I believe that BGEO (LSE: BGEO), the holding company of the JSC Bank of Georgia is a much better buy. 

Accelerating growth 

BGEO offers both an attractive valuation and explosive growth in a country that’s experiencing rapid economic growth as well as a rising demand for loans, wealth management products and insurance. 

Georgia’s economy grew at 4.8% in 2017, faster than all of the developed markets and this helped the Bank of Georgia grow its loan book by 17.4% on a constant currency basis and expand profit by 49.8% for the fourth quarter. Overall, profit for the full year increased by 8.1% and revenue expanded by 23.7% thanks to healthy growth across all of the company’s business divisions. 

The one warning sign in the results is an equity Tier 1 capital ratio of only 8.1%. For comparison, Barclays’ Tier 1 capital ratio was 13.1% of the end of September 2017, although the group does have to hold slightly more capital due to its size and position in the global banking system. Still, BGEO’s management is targeting an improvement in the capital cushion to 9.5% by the end of this year, which should offset some concerns about capital adequacy.

To help unlock more value for shareholders, management is planning to split the business into two separate entities, one focused on banking and one focused on investment management. 

A bright outlook

As well as BGEO’s rapid earnings and profit growth, like Barclays, shares in the bank look cheap today. The stock is currently trading at a forward P/E of 8.5, which seems to undervalue this business, growing earnings per share as a double-digit rate. Also, my Foolish colleague Peter Stephens believes that the market is overlooking BGEO’s dividend potential

All in all, while BGEO might not have the global presence of Barclays, it is growing faster looks undervalued and should continue to register steady growth thanks to its leading position in one of Europe’s fastest-growing emerging economies.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Barclays. 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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