Why I’d Sell HSBC Holdings plc And Buy Bank of Georgia Holdings PLC

Bank of Georgia (LSE: BGEO) reported an impressive set of second quarter results today, as the group’s banking and investment business continued to clock up impressive returns. 

Group profit for the second quarter jumped 16% compared to the previous quarter, and 24% year on year to £20.4m. Earnings per share grew 13% quarter on quarter and 12% compared to the year-ago figure. Group profit for the first-half of the year totalled £38m, up 20% year on year and book value per share increased 19% compared to the year-ago period.

Based on these growth figures Bank of Georgia’s book value per share was £11.50 at the end of the second quarter. The bank currently trades at a price to book value of 1.6. 

Impressive figures 

Bank of Georgia is one of the most profitable and efficient banks trading in London today. And compared to global banking giant HSBC (LSE: HSBA), Bank of Georgia looks to be the superior investment.

Indeed, there are three key metrics, which support this argument. Firstly, the cost to income ratio.

The cost to income ratio, as its name suggests shows a company’s costs in relation to its income. HSBC has been struggling to pull its cost to income ratio down to the mid-50s for the past five years. Unfortunately, the company has failed to meet this goal. Regulatory pressures have forced group costs higher and HSBC’s cost income ratio hit 67% during 2014. 

On the other hand, Bank of Georgia’s cost to income ratio was 36% during the first-half of this year, down from 42% as reported during the first-half of 2014. 

High returns 

Most banks around the world use return on equity (RoE) as their main metric of profitability. RoE measures a bank’s profitability by revealing how much profit it generates with the money shareholders have invested.

HSBC is targeting a RoE of 10% per annum by 2017, although the bank’s management has already reduced its RoE target from 12%. Bank of Georgia’s first-half RoE was 19.3%, almost double HSBC’s minimalist RoE target of 10%. 

Capital buffer

The financial crisis was a wake-up call for the banks that had failed to maintain a strong balance sheet. Six years on and banks, as well as regulators, have realised the importance of maintaining a strong capital buffer to protect against financial shocks. 

As one of the world’s largest banks, with a balance sheet worth more than $2trn, even a small financial shock could rock HSBC. However, the bank’s capital buffer leaves much to be desired. 

HSBC reported a tier one capital ratio of 11.6% at the end of the first-half, which is around the same as the European banking sector average. Nevertheless, Bank of Georgia’s tier one ratio currently stands at 20.4%, which leaves plenty of room for manoeuvre. With such a healthy capital buffer in place, Bank of Georgia has plenty of financial firepower to buy up growth and return capital to shareholders. 

The bottom line

So overall, Bank of Georgia looks to be a better investment than its larger peer, HSBC on several metrics. If you’re looking to invest in the banking sector, then you can’t go wrong with Bank of Georgia, an emerging market leader.