A Small-Cap Bank Alternative To RBS

The Motley Fool

With the crystal-clear view that hindsight gives you, financial shares have clearly been the play of 2012. Any contrarians out there who have filled their boots in the past year have been rewarded in spades.

But I think this is just the beginning of the bull market in banks, and that's why I continue to hold my financial shares. Banks are still a fraction of their market capitalisation before the Great Crisis. The road ahead is long, and I am hopeful of a continued, if possibly bumpy, climb.

So if you haven't yet taken the plunge, I don't think it is yet too late to invest in banks. All of the big banks still, I think, present a strong case for investment.

Sweet Georgia Bank

But there are alternatives to the run-of-the-mill UK banks. One I have identified recently is Bank of Georgia (LSE: BGEO). No, this is not the state in the South-East of the US, but the Eastern European country situated in the South Caucasus.

Bank of Georgia is the leading bank in Georgia, and provides services ranging from retail banking and corporate banking to wealth management and insurance.

What appeals to me about this company is that this is not only a play on financials recovering and re-rating -- it is also a frontier-market play that is on our doorstep.

I regard Georgia as a frontier market as it is exhibiting growth that far outstrips that of developed markets. Before the credit crunch it was growing at 10-12% a year, and in 2011 it grew by 7%.

And the service sector, which Bank of Georgia is part of, is growing particularly quickly. Yet Bank of Georgia is on a forward price-to-earnings (P/E) ratio of just 6 -- on this basis making it substantially cheaper than the big UK banks. In comparison, Barclays is on a forward P/E ratio of 8, and Royal Bank of Scotland is predicted to be on a P/E ratio of 12 when its profitability recovers by the end of 2013.

Reform, not war

So, what are the risks? Well, I see the main risk as political. The political environment has settled down after the South Ossetia war of 2008 and, though you can never say never, I think further ructions are unlikely.

What about corruption? Well, I think in this regard Georgia is well ahead of its giant neighbour across the Inguri river to the north, Russia. Reformist president Mikhail Saakashvili has done much to liberalise Georgia and open up its economy to the West. The World Bank dubbed Georgia "the number one economic reformer in the world" because it has in one year improved from the 112th to the 18th-ranked nation in the world in terms of ease of doing business.

A frontier market opportunity

Thus this company gives you the opportunity to buy into frontier markets without the vagaries of exchange rate fees, currency fluctuations or investment fund charges that you would normally face. It is perhaps a more exotic and exciting financial investment than the usual suspects.

A holding in Bank of Georgia would be complementary to more substantial holdings in banks like Barclays and Lloyds Banking Group.

In my view, a balanced, long-term portfolio is one with exposure to overseas markets as well as your home market. I think you should look to invest in faster growing markets as well as the rather sluggish UK economy. It is one of many steps you can take to grow your wealth and, just possibly, make that million. Learn more about how you really could make a million from shares, with our free report, "Ten Steps To Making A Million In The Market".