Why Royal Bank Of Scotland Group plc & Banco Santander SA Could Be The Perfect Banking Partnership!

A combination of Royal Bank of Scotland Group plc (LON: RBS) and Banco Santander SA (LON: BNC) could boost your returns. Here’s how.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Piggy bank

While the FTSE 100 has plunged by 6% since the turn of the year, 2014 has been a far more positive year for investors in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and Santander (LSE: BNC) (NYSE: SAN.US). That’s because shares in the two banks have risen by 6% and 4.5% respectively year-to-date and, furthermore, there could be more gains to come.

Indeed, with the two banks having different strengths when it comes to reasons to invest, they could prove to be a potent combination in Foolish portfolios. Here’s why.

Value

When it comes to cheap shares, RBS is tough to beat. Despite the worst of the banking crisis now being a distant memory, shares in the bank still trade on a ludicrously low price to book ratio of 0.4. This means that every £1 of net assets in RBS can be purchased for just £0.40 and, while at the height of the credit crunch this made some sense, with asset write downs being much lower now than at any point in recent years (and therefore net assets being unlikely to fall significantly), it is becoming more and more difficult to justify such a low valuation.

Growth

Clearly, both banks have huge growth potential. However, over the next couple of years it is Santander that is set to lead the way. For example, it is forecast to grow earnings by 24% in the current year and by a further 21% next year. This means that Santander’s bottom line is expected to be an incredible 50% higher in 2015 than it was in 2013. Clearly, this rate of growth outstrips the vast majority of peers and shows that Santander remains a stunning growth stock.

Income

While RBS does not currently pay a dividend, it has considerable income potential. Indeed, with sector peers such as Lloyds aiming to pay out 65% of profit as a dividend in 2016, the banking sector as a whole seems to be far less thirsty when it comes to cash requirements moving forward.

So, with RBS set to deliver earnings per share (EPS) of around 30p next year, a dividend yield of 4%+ looks to be very achievable over the next couple of years and, perhaps more importantly, is highly unlikely to put the bank on an uncertain financial footing.

Meanwhile, Santander currently yields a highly impressive 7.2% and, with earnings set to adequately cover dividends from next year, it appears to be a highly sustainable yield, too.

Looking Ahead

So, while both banks have their merits, a combination of the two could prove to be highly potent. While Santander’s growth potential is stunning and its yield is also highly enticing, RBS’s super-low valuation and income prospects make it a strong buy, too. As a result, a mix of the two stocks could turn out to be a very profitable partnership over the medium term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Royal Bank of Scotland Group and Lloyds Banking Group. 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »