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A challenger bank I’d buy to beat the Santander share price

As long ago as February I was enthusiastic about Bank of Georgia Holdings (LSE: BGEO), and you might have been shocked to see a big share price drop in May. But that’s nothing to worry about, as it was just the result of the demerger of its investment business to Georgia Capital.

Thursday brought us third-quarter figures, so what do I think of the remaining banking operation now?

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The Georgia economy appears to be going strongly, with higher lending helping push banking business pre-tax profit up 13.6% on the same quarter a year previously, although diluted EPS came in 8.4% lower. The bank’s loan book growth reached 25.5% year-on-year, and was 8% higher than at the end of the previous quarter.

Strong economy

Many might shrink back from considering an investment that is strongly tied to an unfamiliar economy like Georgia’s. But it does seem to be a strongly emerging market at the moment, with GDP growth in real terms “estimated at 4.9% during the first nine months of 2018, with inflation well contained at 2.7%.”

Compared to our own Brexit-battered economic growth forecasts, lowered by the British Chambers of Commerce in September to just 1.1%, that looks pretty impressive. It doesn’t mean emerging markets are any less risky, mind, but I see that as more than compensated for by the Bank of Georgia share valuation.

We’re currently looking at forward P/E multiples of only around six, which is lower than the lowest of the UK banks, which are facing seriously negative Brexit sentiment. On top of that, analysts are forecasting a dividend yield of 4.6% this year, rising to 5.4% next — and those would be covered more than 3.5 times by forecast earnings.

There are risks here, for sure. But I’m seeing a stock that’s already providing solid dividends and which has attractive growth prospects.

Back in the EU

Talking of cheap-looking banks, Banco Santander (LSE: BNC) shares are currently trading on a prospective P/E ratio of only around 7.5. That’s after the Spain-based bank saw its shares lose 25% of their value over the past 12 months, a worse record even than our own high street big four.

Forecast dividend yields of better than 5% are also on the cards. The cash would be more modestly covered than Bank of Georgia’s at around 2.2 times, but that still doesn’t look too stretching to me. Santander has, in recent years, moved away from a strategy of offering very high but uncovered yields, getting away with it because the majority of its Spanish shareholders took scrip instead of cash.

Dividend potential

But that’s not sustainable without increasing dilution, and the current management has adopted a more conventional approach. It’s still early days for assessing the long-term dividend potential at Santander, but fellow Motley Fool writer Peter Stephens seesscope for a fast pace of dividend growth over the medium term“, based on the bank’s potential for earning growth.

Banco Santander’s exposure to South American investments could be something of a double-edged sword, with potentially strong economies being offset by increasing political division, and that’s probably scaring some investors away.

But Santander is very much global in its outlook, and I see its shares as a good buy now — though I’m still more tempted by Bank of Georgia.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.