If you’re a contrarian investor looking to buy into the beaten-up banking sector, what should you buy? Is it the UK financial leviathan that’s recovering from the ravages of the Credit Crunch? Or is it the emerging market minnow that’s set to grow at a rate of knots? Let’s take a look at the recovering British banking giant first….
Lloyds Banking Group
Ever since the Great Recession, Britain’s banks have taken a battering. A combination of bad debts, low interest rates and immeasureable reputational damage has laid banking profitability, and thus banking share prices, low for these past eight years.
If you want to invest in a company like Lloyds (LSE: LLOY) then you have to be prepared to be in it come thick or thin. I see an investment in this firm as one you should keep tucked away for a decade or more. This should be no short-term trade.
There are plenty of reasons to invest in lloyds. Just look at its strengths: it encompasses the leading mortgage provider in this country, and it’s one of the leading current account providers and business banks in the UK.
But there’s a catch. You see, the question is when will these strengths overcome the debilitating effect of the PPI fines that have hit it hard and the effect of suffocating regulation? I’m not yet convinced that they will.
BGEO Group
Contrast this with BGEO Group (LSE: BGEO), formerly known as Bank of Georgia. This is an emerging market bank that has been completely clear of the troubles that Lloyds knows only too well.
Lloyds investors can only dream about the banking conditions prevalent in Georgia. Interest rates here are not 0.5%, but 8%. GDP growth is running at about 5%. This is a booming emerging market nation, and BGEO is its leading financial institution.
Yet this company is cheap. A predicted 2016 P/E ratio of 6.63 falls to just 5.64 in 2017. A predicted dividend yield of 4.42% in 2016 rises to 5.64% in 2017. That’s remarkable value, and yet this is a growing business. Just look at earnings per share, which are expected to advance from 206p in 2013 to 343p in 2017.
There are no PPI or money-laundering fines. There are no bad debts accumulated from the Great Recession. This is both an income share, and a growth investment. As such, I see this as a stonking buy.
Foolish bottom line
To some extent, the dilemma we face in this matchup mirrors the dilemma investors face in whether to buy into the established markets of the UK, Europe and the US, or the emerging markets of Eastern Europe, Africa, Latin America and Asia.
But, for me, there’s no contest. I would pick BGEO Group over Lloyds.