Could Banco Santander SA Outperform Its UK Banking Peers?


Investors in Santander (LSE: BNC) should be pretty pleased with the performance of the bank’s shares during 2014. While the FTSE 100 has declined by 1%, Santander is up by 8% and has outperformed many of its UK banking peers.

However, with the sector continuing to experience some lumps and bumps, is Santander the best prospect available to investors? Is it really likely to outperform its UK banking peers?

Growth Potential

While the banking sector as a whole is expected to grow at an impressive rate over the next few years, Santander continues to offer bottom line growth prospects that are strong even by banking standards. Indeed, it is forecast to grow earnings per share (EPS) by 23% in the current year and by 21% in the following year. This means that Santander’s net profit is due to be 49% higher in 2015 than it was in 2013, which is a huge leap and shows that it can certainly hold its own when it comes to growth potential.

Income Prospects

In addition, Santander also offers top-notch income prospects. For instance, shares in the bank currently yield a hugely impressive 7.8%, which is more than double the FTSE 100’s yield and above and beyond anything else on offer in the UK banking space. Of course, dividends per share are currently higher than net profit, but a combination of lower payouts and rising profits mean that this is not likely to last, which should give shareholders comfort with regard to the sustainability of Santander’s dividend. Indeed, net profit is forecast to adequately cover dividends in 2015 and beyond.


However, while sector peers such as Barclays (LSE: BARC) and HSBC (LSE: HSBA) trade on price to earnings (P/E) ratios that are well below the FTSE 100’s P/E of 13.3 (being 10.4 and 12.1 respectively), Santander has a P/E ratio that is higher than that of the wider index. Its P/E ratio is currently 14.8 and this means that it trades at a premium not only to the wider index, but a significant premium to sector peers.

Looking Ahead

Clearly, Santander offers hugely strong growth and income attributes right now, while sector peers such as HSBC and Barclays offer less now, but come with vast potential. For instance, Barclays is forecast to grow EPS by 26% this year and by 27% next year (ahead of Santander), but is not forecast to yield 5%+ until next year and into 2016. Meanwhile, HSBC offers a yield of 4.8% but lower growth prospects than Santander, with EPS set to increase by 7% this year and by 8% next year.

So, while Santander is performing extremely well right now, investors may wish to take advantage of what appear to be unjustly low prices for banks such as HSBC and Barclays. They may take a little longer to come good, but their valuations seem to keep them just ahead of Santander in terms of the preferred choices in what remains a highly attractive banking sector. 

Indeed, the banking sector could prove to be a great place to invest. That’s why we’ve put together a simple, straightforward and useable guide called The Motley Fool’s guide to UK banks.

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Peter Stephens owns shares of Barclays and HSBC Holdings. The Motley Fool 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.