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Royal Bank Of Scotland Group plc vs Banco Santander SA: Which Bank Will Double First?

Since reaching a low of 121p in early 2009, shares in RBS (LSE: RBS) (NYSE: RBS.US) have trebled. That’s a stunning rate of growth and shows that even major blue-chip stocks can deliver superb capital gains. Likewise, Santander (LSE: BNC) (NYSE: SAN.US) saw its share price almost treble in the months following its March 2009 low, although it has since fallen heavily to trade just 23% higher than its 10-year low at the time of writing.

Does this mean, then, that Santander is better value than RBS, owing to its weaker share price in recent months? Or, is RBS more likely than Santander to double due to its improving outlook and rising investor sentiment?

Future Catalysts

While RBS has seen its share price move higher in previous years, there could be much more to come. That’s because the government is yet to commence the sale of its stake in the bank and this has the potential to significantly improve investor sentiment in the bank over the medium term. Evidence of this can be seen in the sale of the government’s stake in Lloyds which, although not yet complete, appeared to signal to the market that the bank was through the worst of its performance and was in a healthy enough state for the government to begin to reduce its stake. A similar situation could realistically occur at RBS and send its shares much higher.

For Santander, the catalyst for share price growth is less clear. Certainly, it has strong growth forecasts, with its bottom line due to rise by 14% this year and 13% next year, but its recent capital raising and subsequent comments indicate that it is a bank seeking to improve its financial standing in the long run as opposed to seeking out shorter term growth opportunities. Furthermore, Santander remains lumbered with a fairly hefty dividend. Although it was cut recently by 50%, it still has less capital to reinvest in the business than is the case for RBS, which does not currently pay a dividend.

Valuation

When it comes to which of the two banks is the cheapest, RBS is the clear winner. In fact, it trades on an exceptionally low valuation that means its share price could easily double and still offer good value. For example, RBS has a price to book (P/B) ratio of just 0.71, which means that if its shares were to double it would trade on a very reasonable P/B ratio of 1.42.

In Santander’s case, its P/B ratio of 1.14 is significantly higher than that of RBS and, although its shares could still double in value and not be vastly overpriced, they clearly have less scope for an upward rerating than those of RBS.

Looking Ahead

While the banking sector in the UK and Europe remains very fragile, now could be a great time to buy shares in a number of banking stocks; including RBS and Santander. Both banks have endured a highly challenging period and could emerge in a stronger position than before the credit crunch, with significant share price growth on the cards. However, as for which one is more likely to see its share price double, RBS is the clear winner owing to its much more appealing valuation and clear catalyst that could send its shares to 720p and beyond.

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Peter Stephens owns shares of Royal Bank of Scotland 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.