The Banco Santander (LSE: BNC) share price has been on a roll this year, rising 18.43% since January. That’s a much brighter performance than the FTSE 100 bank I’ve personally been snapping up in recent months. Have I backed the wrong (black) horse?
I’ve focused my firepower on Lloyds Banking Group, whose shares have failed to reward my faith in them so far, falling 5.43% year-to-date. Over 12 months, Santander has done even better, rising 45.43% against meagre growth of just 4.06% from Lloyds.
Past performance figures are no guide to the future, as we all know, but there are other reasons why Santander could outshine Lloyds.
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These are two very different operations. Santander is one of the largest banks in the world, with operations in Europe, the US and two particularly fast growing regions, Latin America and Eastern Europe. In contrast, Lloyds is a low-risk, low-growth operation that is now almost totally focused on the UK market. Its market cap of £28.72bn pales against Santander’s €56bn and the gap is likely to widen over time.
Buying the banks
Santander would have posted full-year attributable profit of €2.795bn in Q1, but for a temporary €224m banking levy that cut the annual increase from 8% to 1%. The figure that leaps out is that the group added 9m customers in the last year alone, lifting the total to 161m. Lloyds has 26m and that probably won’t rise by much.
Both passed last week’s Bank of England stress tests without a hitch. They’re also keen to reward shareholders. Santander recentlyincreased its shareholder payout ratio from 40% to 50% of attributable profit in 2023, a figure that includes share buybacks.
Santander is forecast to yield 4.79% this year and 5.89% in 2024. Lloyds looks set to be even more generous, with a forecast yield of 6.32% this year and 6.95% in 2024. These yields are all well covered more than three times by earnings. They’re both top income stocks.
Both look cheap too. Santander trades at a cheap-looking forward valuation of 5.85 times earnings for 2023, with Lloyds at 6.04 times. Sector valuations are low across the board, as investors worry about a global recession, and banks likely to see an increase in loan impairments as a result.
Santander suffered €2.9bn worth of loan-loss provisions in Q1. Lloyds set aside a much smaller sum of £243m for debt defaults in Q1. These are likely to rise with inflation still rampant as the Fed, European Central Bank and BoE are still hiking interest rates.
There’s a chance the global banking crisis could return with a vengeance. Santander wasn’t particularly troubled by this year’s problems, but with operations across the US, Europe and Latin America, there is a danger that panic in one region could spread. Lloyds looks much safer on that score. I have to balance that risk against Santander’s more exciting growth prospects.
I’m happy to have bought Lloyds shares, and with luck they should start to recover when the BoE gets on top of inflation. But my next banking sector purchase, when I have some cash to spare, will be Santander. It’s good to spread the risk around, and the rewards.
