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Is Banco Santander SA A Better Buy Than HSBC Holdings plc Or Lloyds Banking Group PLC?

SantanderDespite the banking sector posting disappointing share price gains in 2014, Santander (LSE: BNC) has bucked the trend and gained 10% in the first half of 2014. That’s considerably better than the FTSE 100‘s performance over the same period (it’s currently down 1%), and is above and beyond the falls of 10% and 8% that HSBC (LSE: HSBA) (NYSE: HSBC.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US) have recorded. Can Santander continue to beat two of its biggest rivals?

Strong Growth Prospects

2014 is a big year for the banking sector. It’s the year when Lloyds, for example, is forecast to return to profitability and when banks such as HSBC and Santander are forecast to deliver double-digit growth in earnings per share (EPS). Indeed, over the next two years, Santander is expected to increase earnings by 23% in 2014 and by 20% in 2015, which is clearly an extremely impressive rate of growth. While HSBC and Lloyds are due to deliver FTSE 100-beating growth in profits over the same time period, their growth rates of 10% and 8% respectively in 2015 are simply not as high.

Growth At A Price

Of course, as is often the case a higher growth rate must be paid for. So, while Lloyds and HSBC are growing at a brisk pace, their valuations offer considerable potential for investors. That’s because there is scope for their respective price to earnings (P/E) ratios to increase significantly. Indeed, HSBC trades on a P/E of just 11.1, while Lloyds has a P/E of just 9.7. Clearly, both companies offer fantastic value.

However, Santander’s growth rate appears to be at least partly priced in. That’s because it trades on a P/E of 15.2, which is slightly higher than the FTSE 100’s P/E of 13.9 but is over 50% above that of Lloyds. Certainly, Santander is forecast to deliver a much higher growth rate over the short to medium term, but investors could turn their attention to much better value (and still strong growth stocks) such as Lloyds and HSBC.

Looking Ahead

Therefore, while Santander looks to be on the brink of delivering great results over the next two years, Lloyds and HSBC could prove to be the better investments. Their mix of growth and value could prove to be more enticing to investors than more growth and less value, which is currently on offer at Santander.

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Peter Stephens has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.