2 surprising banking stocks I’d buy today

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Investors are spoilt for choice when it comes to banking stocks. There are five giants in the FTSE 100 alone: HSBC with a market cap of £152bn, Lloyds (£49bn), Barclays (£34bn), Royal Bank of Scotland (£33bn) and Standard Chartered (LSE: STAN) (£27bn).

What many investors may not know is that there’s also another behemoth tradeable on the London market in the shape of £80bn cap Banco Santander (LSE: BNC). I believe this Spain-headquartered international group has considerable investment appeal right now and that Standard Chartered is also deeply in value territory.

Good value for money?

Santander has attractive geographical diversification. Around half its profit comes from mature markets in Europe, where the largest contributors are the UK (16%) and Spain (15%). The other half comes principally from Latin America, notably Brazil (26%). Economic conditions are improving in Brazil after the worst recession in its history and Santander’s underlying attributable profit in this important market jumped 42% last year.

In his recent review of the bank’s results, my Foolish friend Royston Wild also drew attention to rising economic growth across all its Latin American units. And pointed out that current relatively low banking product penetration in these regions is likely to keep demand for Santander’s products shooting higher in the years ahead.

Indeed, I think it’s fair to say that the group’s nice blend of established markets and faster growing developing economies should provide a stronger long-term tailwind for top-line growth and increasing profits than a mature-market operator, such as Lloyds, which also comes with single-country risk.

In 2017, Santander delivered an 8% increase in underlying earnings per share (EPS) to €0.463 (41p at current exchange rates). This gives a trailing price-to-earnings (P/E) ratio of just over 12 at a share price of 495p. As annualised EPS growth is forecast to accelerate to double-digits, the P/E looks good value for money to my eye. And with 2017’s dividend of €0.22 (19.5p) giving a yield of 3.9% and also set to advance strongly, I rate the stock a ‘buy’.

Deeply in value territory?

Standard Chartered was formed in 1969 by the merger of the Standard Bank of British South Africa and the Chartered Bank of India, Australia and China. For a long time, the growth it generated in fast-developing economies in Asia and Africa made it something of a market darling. Its shares reached a peak of over 1,700p in 2013.

However, it ran off the rails, due partly to macro conditions in some of its markets and partly to company-specific issues. In 2015, under a new chief executive, it announced a strategic review, scrapped its final dividend and conducted a deeply discounted fundraising at 465p.

The overhaul has focused on enhanced controls and efficiency, plus investment in key growth businesses. Recovery is under way and the shares have climbed to 820p over the last two years. I believe they have a lot further to go due to the long-term growth prospects in the bank’s principal markets.

The City expects the group to report EPS of $0.55 (39p at current exchange rates) for 2017, followed by a 35% increase to $0.74 (53p) this year. The forward P/E is 15.5 but the price-to-earnings growth (PEG) ratio of 0.44 is deeply on the value side of the PEG ‘fair value’ marker of one. As such, and with a dividend that is expected to be reinstated imminently, the shares look very buyable to me at their current level.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.