Since going public in March 2012, shares of BGEO Group (LSE: BGEO) have returned a whopping 175% while those of banking behemoth Barclays (LSE: BARC) have lost 10% in the same time frame. But now that Barclays is finally making tentative progress towards solving the problems that have plagued it since the Financial Crisis, can shares of the British bank catch up to those of the much smaller BGEO group?
Now on the face of it, comparing BGEO, the holding company for Bank of Georgia, and Barclays seems a bit like comparing apples and oranges. However, a retail bank with low operating costs, a very profitable investment bank, no legacy misconduct issues and stunning profitability shows that Bank of Georgia is what Barclays should aspire to be. And the phenomenal returns of BGEO over the past five years show exactly why investors should cheer for this.
The driving forces behind its success have been steady mid-single-digit GDP growth for the past decade in Georgia, and a successful programme of taking market share from competitors by offering best-in-class retail banking capabilities. The bank now has around 30% market share in the country and growing scale has allowed it to keep operating costs much lower than comparable British banks. In first nine months of 2016, Bank of Georgia’s cost-to-income ratio was a stunningly low 37.7%, while return on average equity was a very impressive 22.8%.
This high level of profitability combined with top line growth boosted profits by 57.9% year-on-year to £112.2m in the first three quarters of 2016. And with return on equity steadily rising and the bank targeting 20% annual growth in the retail operation over the medium term, there’s plenty of potential future profit growth. This is great news for investors as the bank’s policy of returning 50% of profits in dividends means analysts are pencilling in a 3.5% dividend yield in the year ahead. BGEO shares are very pricey at 2.4 times book value, but if Bank of Georgia continues to impress, this lofty valuation could make sense in the long term.
Cheap for a reason?
Meanwhile, shares of Barclays are still trading well below their tangible book value at 0.78. There’s good reason for this. Return on tangible equity (RoTE) reduced year-on-year in the first nine months of 2016, from 5.8% to 4.4%, as the £44bn of non-core bad assets ran up a staggering £1.4bn loss. While management is making progress in divesting these assets, it’s slow going and they will continue to be a drag on the overall group for some time to come.
On the bright side, core operations excluding exceptional items RoTE was a much better 10.7% in the period, driven by solid returns from the UK retail bank and stunning 21.3% RoTE from credit card operations. Unfortunately, fantastic returns from Barclaycard continue to be obscured by the billions of bad assets on the books as well as the massive transsatlantic investment bank whose RoTE in the period was a meagre 8.7%.
With billions of bad assets still to be sold, a management team clinging to an investment bank whose returns lag its cost of capital, a stubbornly high cost-to-income ratio of 73%, and dividends slashed, I’d bet on Barclays’ shares continuing to underperform BGEO’s in the coming years.