2021 has so far proved to be a happy time for the Lloyds Banking Group (LSE: LLOY) share price. Prices of the FTSE 100 firm have soared 20% since share trading began in January and are up by almost 50% year-on-year.
It’s no surprise that some investors are attracted to the Lloyds share price. The Covid-19 vaccination drive on these shores has gone off almost without a hitch. So hopes of a strong economic rebound have grown, boosting expectations that Lloyds’ revenues will surge and bad loans will stop streaming in.
Yet despite these rises the share price still looks mighty cheap on paper. City analysts think the bank’s earnings will soar 240% in 2021. This leaves a price-to-earnings growth (PEG) ratio of just 0.1, a distance below the bargain benchmark of 1. Lloyds also carries a meaty 3.7% forward dividend yield, one that nudges ahead of the broader average for UK shares.
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Danger ahead
All that said, the cheap Lloyds share price isn’t something I’m tempted to grab a slice of. It’s not just the threat of a fresh surge of Covid-19 cases means, and what this could do to near-term profits expectations.
There are obstacles facing Lloyds that concern me as a long-term investor. How will the FTSE 100 business rise to the challenge of increasing competition? And will it have the wherewithal to compete with the smaller, nimbler digital-based banks in particular? How could it cope if interest rates remain locked at rock-bottom lows for another decade? Can Lloyds be expected to deliver strong earnings growth beyond 2021, given its lack of exposure to fast-growing foreign markets?
I’d ignore Lloyds share price and buy this bank
All this explains why I’d rather invest in Banco Santander (LSE: BNC) today. Of course this business faces some of the same challenges as Lloyds, like low interest rates. But I think this particular UK banking share is in a much better place to deliver strong long-term returns.
This is because Santander has considerable emerging markets exposure. In these regions populations are growing quickly and wealth levels are booming, yet financial product penetration remains extremely low. This provides exceptional revenues opportunities for banks in this region. South America is Santander’s largest market, from which it sources around 42% of underlying profit.
Covid-19 presents a significant risk to Santander in the near term. The public health emergency is much worse in its core Brazilian marketplace in particular, casting a shadow over the country’s economy. What’s more, Brazil’s economy is highly dependent on strong commodity prices. A fresh plunge in raw material values should the pandemic worsen could also deal a heavy blow to trading conditions at Santander.
That being said, I’m still confident that this banking business should deliver solid returns over a long time horizon. And today the bank trades on a PEG ratio of just 0.7 for 2021. This, along with a chunky 4.2% dividend yield, makes Santander a very attractive buy for me, in my opinion.
