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Is Banco Santander SA A Better Buy Than HSBC Holdings plc And Royal Bank Of Scotland Group plc?

The last six months have been rather mixed in terms of the share price performance of banking stocks. For example, while RBS (LSE: RBS) has soared by 20%, HSBC (LSE: HSBA) (NYSE: HSBC.US) is up just 2%. However, even that performance is better than Santander’s (LSE: BNC) (NYSE: SAN.US), with it seeing its share price fall by 12% during the period.

More important for investors, though, is their future performance. So, looking ahead, could Santander turn the tables and outperform RBS and HSBC in 2015? Or, will recent past performance simply be repeated during the course of the year?

Income Prospects

When it comes to dividends, Santander is tough to beat. That’s because it currently yields a whopping 7.3% and, crucially, is set to post profit this year that comfortably covers its dividend for the first time since 2010. This should put Santander on a firmer financial footing moving forward, and allow it the scope to make modest increases to dividends over the medium term.

While HSBC also has a very appealing dividend yield of 5.8%, it is still some way behind that of Santander. And, while RBS is forecast to recommence dividends in the current year, they are set to be at an extremely low level in the short run. In fact, RBS is due to yield just 0.4% in the current year, which makes it appear somewhat unappealing as an income stock.

Looking Ahead

However, HSBC and RBS could have greater long-term potential than Santander. That’s because, while their yields are much lower, they have payout ratios that are significantly below that of Santander, with HSBC having a payout ratio of 59% and RBS forecast to pay out just 4% of profit this year.

Both of these figures are markedly below Santander’s payout ratio of 83% and, in fact, were HSBC and RBS to pay out the same proportion of profit to shareholders as Santander does, they would yield 8.2% and 7.3% respectively. The fact that they don’t means that they appear to have more scope to improve their capitalisation ratios and invest for future growth, which could deliver an improved long term earnings growth profile.

Valuation

Despite rising by 20% in the last six months, RBS still trades on a relatively low price to earnings (P/E) ratio of 11.5. This is on a par with that of Santander, but is higher than HSBC’s P/E ratio of 10.2. Of course, all three banks seem to offer great value when compared to the wider market, with there being significant upward rerating potential while the FTSE 100 has a P/E ratio of 14.7. As a result, all three banks could see their share prices move higher during the course of 2015.

However, Santander does not seem to be the best investment proposition of the three banks. Certainly, it offers a superb yield, but this is mainly due to a relatively high payout ratio and, in the long run, a lack of reinvestment could mean that it is less financially sound than its peers. In addition, HSBC seems to offer better value for money, while sentiment in RBS appears to be much more favourable than for Santander (as shown by their recent share price performance) and yet they trade on the same P/E ratio.

So, while Santander could be worth buying right now, HSBC and RBS still seem to offer better prospects – especially for longer-term investors.

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Peter Stephens owns shares of HSBC Holdings and Royal Bank of Scotland Group. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.