What Do Bank of Georgia Holdings PLC And Standard Chartered PLC Have In Common?

Bank of Georgia (LSE: BGEO) is one of the market’s most exciting companies. 

You see, Bank of Georgia is no ordinary bank. In fact, the entity is a holding company for JSC Bank of Georgia, a healthcare business, and several private equity style investments. 

What’s more, the company operates within one of Europe’s most free-market economies (Georgia) where there’s plenty of room for growth.

Georgia’s banking sector is relatively underdeveloped and highly fragmented. So, there are plenty of opportunities for Bank of Georgia to take advantage of. The group already has more than a third of Georgian banks’ market share. 

Bank of Georgia’s first-quarter results showcased the bank’s strengths. Group revenue jumped by 39% year on year and banking net interest income rose by 50% thanks to the bank’s acquisition of Georgia’s 9th largest bank, Privatbank during the fourth quarter of last year.

Moreover, during the first quarter Bank of Georgia’s healthcare gross income increased by 81% year on year. 

Growth story

As two emerging market banks, Bank of Georgia and Standard Chartered (LSE: STAN) have many similar qualities. Bank of Georgia is profiting from the rapid growth of Georgia’s economy, which grew 5% during 2014. While Standard continues to benefit from Asia economic development and the region’s expanding wealth. 

However, unlike Bank of Georgia, Standard’s growth has hit a wall, loan impairments are rising and the bank has come under fire from regulators for lax money laundering controls. 

Standard could be accused of sacrificing quality for quantity in its quest for growth and now, this is coming back to haunt the bank. 

Falling returns 

Standard’s return on equity — a key measure of bank profitability — has slumped over the past decade. From a high of 18%, as reported at the end of 2005, ROE fell to around 13% during 2010 and 2011 and then slumped to a dismal 5.4% for full-year 2014.

Standard’s management is now working flat out to try and boost ROE to “over 10% in the medium term” but this is a far cry from the bank’s historic average. 

On the other hand, Bank of Georgia is targeting a much higher return. 

4×20

Bank of Georgia’s management has put in place a plan for growth that it has named the 4×20% plan for obvious reasons.

Under the plan, the bank is targeting a consistent return on equity of 20% per annum, a tier one capital ratio of at least 20%, 20% per annum growth in customer lending and an internal rate of return of 20% on any investments made. 

The group is close to hitting these key targets. During the first quarter, return on average equity came in at 19.8%, the bank’s tier one capital ratio stood at 20.8%.  Customer lending increased by 40.3% year on year, and most of the company’s investments reported an IRR of 30% to 165% during the period. 

Top growth stock 

Bank of Georgia’s earnings per share are set to fall by 9% this year, although analysts believe that they will rebound by 23% during 2016. 

Based on the City’s current numbers the bank’s shares are trading at a forward P/E of 8.6 and will support a dividend yield of 4.2% this year. Based on City projections Bank of Georgia is currently trading at a 2016 P/E of 7.1.