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A FTSE 250 bank I’d buy today, alongside the RBS share price

I’ve always thought the ‘challenger’ banks could have great potential as investments. They got in when confidence in the big banks was badly shaken worldwide, were starting from a clean slate, and they really only need to make relatively small inroads into the market to snag some nice profits.

But against that, there’s potentially more risk associated with smaller upstarts, as the recent problems at Metro Bank show only too painfully, after its share price collapsed due to a rather startling error in incorrectly assessing the risk bands of a portion of its lending.

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Building strength

Bank of Georgia Group (LSE: BGEO) is a little different, and though it’s still pretty small by world banking standards, the economy of its home country of Georgia is looking strong. The FTSE 250 bank’s shares are on a very low forward P/E of around six, and forecast dividend yields are already as high as 5.4% and still covered three times by earnings.

The bank has also taken the step of de-merging its investment business to concentrate on retail banking, echoing a strategy that the big banks are increasingly adopting.

Decent start

A Q1 update Tuesday painted a healthy picture. The bottom line was hit by one-off termination costs after the appointment of a new CEO followed by a number of new deputy CEOs. After adjusting for that, profit was pretty much flat, but without those costs the bank recorded a 10.6% rise in pre-tax profit.

Bank of Georgia’s loan book grew by 22.4% year-on-year and by 1.8% quarter-on-quarter, and liquidity measures look strong with a CET1 ratio of 12.7% (well ahead of the 9.6% minimum requirement).

Bearing in mind the risks, I like the look of Bank of Georgia.

Faltering shares

Meanwhile back on these shores, I’m still seeing Royal Bank of Scotland Group (LSE: RBS) shares as undervalued, even considering the risks of Brexit and the possibilities of what Jeremy Corbyn might do with the bank if he wins the next election.

RBS shares have gone off the boil in the past 12 months with a 21% loss, and that wasn’t helped by an unimpressive first-quarter update in April. Operating profit dipped by 16%, with the bank speaking of “ongoing UK economic uncertainty.

Gross new mortgage lending at £7.6bn looked comfortable though, and that strengthens my feeling that fears for a housing collapse in the UK are seriously overblown. RBS is also still “on track to meet our £300 million cost reduction target this year, achieving a £45 million reduction in the quarter.”

Big dividends

Forecasts are very strong (even if they might be downgraded a little in response to Q1 figures), and put RBS shares on P/E multiples of 8.8 for this year and just 7.8 next.

In addition, if dividend forecasts come good, we’ll be looking at a yield of 5% this year, rising to a seriously big 6.5% for 2020. I’m a little cautious here, mind. Dividends would be around twice covered by earnings, but I can’t help thinking a slightly more conservative approach might be better for the long term — keeping rises to around inflation until we see what post-Brexit Britain is going to look like could reduce risk and boost confidence.

But overall, I’m still bullish on the prospects for Royal Bank of Scotland.

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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.