Make no mistake: the ambitious cost-cutting and divestment drive of recent years has left banking giant Lloyds (LSE LLOY) a much leaner, more capital-efficient entity than that prior to the 2008/2009 financial recession.

This has led to a steady improvement in the firm’s balance sheet — Lloyds’ CET1 rating rose to 13% in December from 12.8% a year earlier — and consequently a resurrection of the bank’s dividend policy.

But many investors are becoming fearful that Lloyds’ streamlining drive, and subsequent dependence upon the UK High Street, leaves it at the mercy of cooling economic conditions at home.

Britain shakes

Of most concern — not just for Lloyds but the entire Footsie, of course — is the possibility of a ‘leave’ vote at June’s European Union referendum.

Indeed, the IMF warned last week that “a British exit from the European Union could pose major challenges for both the United Kingdom and the rest of Europe“, adding that an exit would “likely disrupt and reduce mutual trade and financial flows” as well as hit business investment and confidence.

Britain’s economy is already showing signs of slowing, as evidenced by the rare rise in the jobless total reported on Wednesday. The unemployment count rose by 21,000 during December-February, the ONS noted, to 1.7 million.

Latin opportunities

Aside from these immediate threats, Lloyds’ ‘safe’ approach of focussing on its retail operations is not expected to deliver stonking earnings growth in the longer-term.

This factor has seen many investors switch into banks with strong emerging market exposure such as Santander (LSE: BNC), a firm whose vast presence across Latin America in particular is projected to deliver explosive returns in the years ahead.

The Spanish bank currently generates close to four-tenths of total profits from South America alone, and this figure is likely to rise in the coming years as surging income levels supercharge banking product demand.

Brazil bombs

But in the near-term I believe Santander’s reliance upon the Brazilian economy makes it a risk too far.

A resurgent Brazilian real is not expected to continue its uptrend, while economic growth in the country remains hampered by weak commodity prices. On top of this, the political malaise engulfing Brazil is likely to result in extra headwinds for Santander looking ahead.

And of course Santander — like Lloyds — also depends considerably upon the health of the UK economy. Britain is now the bank’s single largest market, and is responsible for around a quarter of total profits.

And the winner is..?

So while Lloyds can hardly be considered a ‘risk-free’ investment, I believe the business can be considered a much more secure banking selection than Santander.

Besides, Lloyds provides much better bang-for one’s buck than its Spanish peer. For 2016 the ‘Black Horse’ bank changes hands on a mega-cheap P/E rating of 8.9 times versus Santander’s reading of 10.1 times.

And Lloyds’ dividend yield of 6.5% for the current period also blows its rival’s 4.7% yield clean out of the water.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.