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Why I’d Buy HSBC Holdings plc, Hold Royal Bank Of Scotland Group plc & Dump Banco Santander SA

For me, HBSC (LSE: HSBA) is a decent buy between 550p and 600p a share.

Elsewhere, I suggest you hold Royal Bank Of Scotland (LSE: RBS) at this price, aiming for a 20% pre-tax return, but I am still not too convinced about the prospects for Santander (LSE: BNC)

HSBC: On Its Way Up? 

Latest news points to strong appetite for Asian banks’ debt issuances, which signal that HSBC continues to be an undervalued stock. 

“HSBC and Standard Chartered each completed large AT1 issues in the Yankee market last week, raising a combined US$4.25bn and underlining the depth of global demand for the contingent convertible instruments,” Reuters reported on Friday. 

Together, the two deals drew orders of $37bn, Reuters added, and that’s not surprising, given a yield north of 6% for the two offerings. While it’s true that Asian banks may need to raise more capital to please regulators and shareholders, it’s undeniable that they have full backing of yield-starved investors. 

HSBC is an enticing investment, one with a forward yield above 6%.

So, it’s tempting to add it to your portfolio ahead of first-quarter results, which are due 5 May. Comparable quarterly figures are not impossible to beat, and the shares are down 6% this years, having underperformed Barclays (+0.45%) and Lloyds (+3,81%). 

RBS: Not Too Bad

RBS is the worst performer in the peer group, with its stock down 11% so far this year. 

At 343p, the stock is relatively cheap based on most trading metrics, but it’s a race against time for management, who must swiftly implement structural changes to please investors. 

The bank is shrinking, and the speed at which it will reduce its geographical reach is pivotal to determining the success of this restructuring story. RBS is the midst of a comprehensive restructuring, which recently showed the bank can achieve a decent level of core profitability, while maintaining safe capital ratios. It needs a strategic partner.

Risk takers should feel comfortable to bet on a rise to 410p by the end of 2015, for an implied 20% upside. 

Santander: It’s Still Expensive

Santander is down 2% this year, and has fallen almost 10% in the last six months. The shares are not cheap enough to deserve attention, in my view. 

The bank cut the dividend by two-thirds and announced a huge rights issue on 8 January, since when the stock has surged 16%. I have yet to be convinced that the rally is sustainable, and I do not support the management team.

Moreover, I reckon its geographical break-down offers investors more downside than upside right now. 

Its forward yield is at about 3% and looks solid, however. The average price target from brokers is a tad above Santander’s current valuation, but has come down by 10% since October 2014. I need more evidence that Santander can deliver on its promises to add its shares to my wish list… 

To he honest, I am not a big fan of banks at this point the business cycle, so I suggest you hunt for value elsewhere: for example, you would do well to add a smaller outfit to your portfolio -- all details of which can be found in our free value report!

This gem has no debts and its shares look really cheap, in spite of a +600% performance since 2010. Its forward yield is not particularly appealing, true, but this remain a terrific growth story that could be had at a great price.

Download our Motley Fool report right now: it is completely free only for a limited amount of time!

Alessandro Pasetti has no position in any shares mentioned. 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.