When it comes to the banking sector, I’m pretty bullish about some of them, like Lloyds Banking Group and Barclays, but there are some I wouldn’t touch with a bargepole right now — and Royal Bank of Scotland (LSE: RBS) is one of them.

One thing I couldn’t figure was why RBS’s shares were rising as strongly as better-performing banks and commanding a higher P/E. Why when it was so badly hammered during the crunch and was so much slower getting back into shape than bailed-out competitor Lloyds? But in recent months the market has seen sense. RBS shares have had some of their overvaluation rectified — the shares have dropped 45% since late February 2015, to 222p, and now command forward P/E multiples of 11.6 on this year’s forecasts, dropping to 10 for 2017.

Of course, the near-£2bn loss just reported for 2015 contributed to that downturn, even though it was a fair bit less than the £3.47bn lost in 2014. RBS surely has a reasonable long-term future, but with only a hope of a 0.3% dividend yield this year, I see much better bargains in the sector on more attractive P/E ratings.

Overseas woes

While most of the banking sector has been picking up, Standard Chartered (LSE: STAN) has been steadily heading downwards — its shares have shed a whopping 74% in three years, to 449p. Standard’s Korean operations had a terrible time, leading to a board shakeup after sustained criticism from major investors. Then there’s China, and the bulk of the bank’s business is done in that country and its immediate neighbourhood. We still have no idea how far the Chinese slowdown will go and for how long.

Standard Chartered reported a pre-tax loss of $1.5bn for the year to December 2015, and though it has a profit forecast for this year, that would put the shares on a P/E of 21. That would drop to 11 on 2017 forecasts, but Barclays is on a far lower 2017 P/E of just seven, so why would you risk Standard Chartered?

It doesn’t help that Moody’s has cut its rating on Standard’s long-term debt, believing profitability will be weak for at least two more years.

Poised for greatness?

If you’d asked me as recently as 2014, I’d have put Banco Santander (LSE: BNC) in bargepole territory too, mainly because of its bizarre dividend policy. The bank was paying dividends far in excess of earnings, and could only do that because most Spanish shareholders took scrip instead of cash — but nothing is free, and the inexorable dilution was unavoidable.

But after Ana Botín took over as executive chair from her late father, the bank has ploughed a more conventional furrow. Dividends were slashed to amounts sustainable from earnings, and there are now well-covered yields of around 4.7% forecast for the next few years.

The share price has picked up 22% since 11 February, to 329p, but forecasts still suggest a P/E of nine, dropping to a little over eight by 2017 — Banco Santander looks like a solid buy to me.

Investing in banks should provide you with a steady and growing stream of dividends, which have the potential to lift your income year after year. Our newest report, A Top Income Share From The Motley Fool, reveals a company that might just fit that bill.

It's a company with a market cap of around £500m, so it's not a high-risk tiddler, and dividends have been growing very strongly over the past few years.

Want to know more? Click here to get your completely free copy of the report delivered to your inbox today.

Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.