Bank of Georgia (LSE: BGEO), OneSavings (LSE: OSB) and Santander (LSE: BNC) are undoubtedly the three best banks trading in London today. But if you had to pick just one for your portfolio, which bank should you buy?
A brief introduction
Santander is an international play, OneSavings is a domestic play, and Bank of Georgia is a play on one emerging market.
Under the leadership of the bank’s previous Chairman, Emilio Botin, Santander has spent a staggering $70bn transforming itself from a small, provincial Spanish lender into Europe’s second-largest bank by market value.
A large percentage of Santander’s profits now come from emerging markets, specifically, Brazil, where Santander generates around a fifth of its income. In addition, the group is looking to increase its presence within mature economies like the UK, US, and Germany.
Domestic challenger bank, OneSavings sells itself as a buy-to-let mortgage specialist. The bank also targets the SME market. Targeting these two specialist sections of the market, with a different approach to mainstream lenders, has helped the group triple pre-tax profits since 2013. And OneSavings remains one of the UK’s fastest growing challenger banks. The bank is well-placed to benefit from an increasing demand for buy-to-let mortgages and SME lending.
Bank of Georgia offers a well-diversified play on Georgia’s booming economy, which grew by more than 4% during the first half. But Bank of Georgia isn’t just a bank. The group owns assets across Georgia, including hospitals, water, utilities and housing. Georgia Healthcare Group, part of the Bank of Georgia’s investment arm, has a market share of 22%, with 2,140 hospital beds across the country. Moreover, Bank of Georgia’s financial metrics are second to none.
Crunching numbers
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. ROE is considered to be one of the best metrics to use when comparing the performance of potential bank investments.
Bank of Georgia has put in place a 4×20% plan. Simply put, this plan outlines management’s strategy to achieve a consistent return on equity of 20% per annum, a tier one capital ratio of at least 20% and a 20% per annum growth in customer lending. According to the bank’s most recent reports, Bank of Georgia is hitting all of these targets.
Meanwhile, Santander’s management has laid out a set of key performance targets for the bank to hit by 2017. These include loan growth ahead of a 17-strong global peer group, a return on tangible equity (ROTE) of 12% to 14%, a core Tier 1 capital ratio (financial cushion) of 10% to 11%, a non-performing loan ratio under 5% and a cost-income ratio below 45%.
And finally, OneSavings reported an ROE of 31% for the six months ended 30 June 2015, a tier one capital ratio of 11% and a cost-income ratio of 26%.
Valuation is key
Out of these three contenders, OneSavings seems to be producing the best returns for shareholders, reporting an ROE of 31% for the first-half of 2015. However, the bank trades at a premium valuation to its peers.
OneSavings currently trades at a forward P/E of 11.5 while Santander and Bank of Georgia trade at forward P/Es of 10.2 and 8.8 respectively.
