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How Banco Santander SA Has Been Thrashing Barclays PLC, Lloyds Banking Group PLC, HSBC Holdings plc & Royal Bank of Scotland Group plc

SantanderUK investors have a habit of overlooking Banco Santander (LSE: BNC) but they may be missing a trick. Lately, the Spanish institution has thrashed its UK-listed banking rivals.

Over the last 12 months, shares in Santander grew almost 25%. That compares to just 5% growth on the FTSE 100 and, more dramatically, a 16% fall in the share price at Barclays (LSE: BARC)

In that time, Lloyds Banking Group (LSE: LLOY) delivered zero growth, HSBC Holdings (LSE: HSBA) fell 8% and only Royal Bank of Scotland Group (LSE: RBS) produced a positive share price return, a less than thrilling 5%.

Santander stands tall. 

Annus Horribilis

UK banks have had a wretched year. The sector has suffered an endless string of mis-selling and rate-rigging scandals, with hundred million-dollar fines becoming routine (they still eat into profits, though).

The subsequent regulatory crackdown looks to be limiting their growth prospects, while the Competition and Markets Authority’s investigation into personal current accounts, still 80% dominated by the big four, also threatens margins.

Big Bad British Banks

UK banks have also suffered their own personal woes. Barclays’ chief executive Anthony Jenkins stumbled into a nasty row over bonuses, sparking a shareholder revolt that effectively ended its ambitions to be a global investment banking force. HSBC has been caught short by the emerging market slowdown. After a breakneck two years, Lloyds is pausing for breath.

Only RBS has surprised on the upside lately, but there’s still no dividend, and any future return to private ownership remains clouded in uncertainty.

Investing in the UK banks is now an act of faith. Or maybe a contrarian’s dream.

Spanish Practices

There has been plenty of pain in Spain as well. Santander is no ‘good’ bank. After the financial crisis, it shocked markets with a €7.2bn rights issue.

Three years ago, it had to plug a £13bn capital shortfall. It mis-sold PPI, like everybody else. And in March, the Financial Conduct Authority fined its UK arm £12.4m for financial advice failings.

Santander is no saint.

World Bank

But the eurozone’s largest bank is returning to health, posting a 22% increase in first-half profits of €2.76bn, helped by a recovery in lending, a drop in loan impairments and falling costs. Q2 profits were its highest in two years.

The UK is actually its biggest single market, generating 20% of group profits, giving its exposure to the next phase of the domestic recovery (if it comes). 

It has delivered attractive products in this country, notably the massively popular Santander 123 account. This now has more than two million customers, attracting one in four of those moving bank following the introduction of the fast-track current account switch service in September 2013.

Investors should also note that Santander generates 39% of its profits in Latin America, primarily Brazil, Mexico and Chile, making this an emerging markets play (for better or worse).

The eurozone may be sliding, but Santander’s exposure is limited, as it only generates 27% of its profits from the region.

Lucky Numbers

Santander’s growth prospects look bright. Earnings per share are forecast to grow 23% this calendar year, and 21% in 2015. Today’s yield of 8.1% is striking, but unsustainable. It is forecast to slide to 6.9% by December 2015, but could dip even lower.

Buoyed by recent successes, the market is setting a higher price on Santander, which currently trades at 18.5 times earnings. Santander trades at a forecast 15.1 times earnings for December 2014, far higher than Barclays (10.3x), HSBC (12x), Lloyds (10.1x) and RBS (12.8x).

It’s time for UK investors to take a closer look at Santander.

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Harvey Jones 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.