While the FTSE 100 has plunged by 6% since the turn of the year, 2014 has been a far more positive year for investors in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and Santander (LSE: BNC) (NYSE: SAN.US). That’s because shares in the two banks have risen by 6% and 4.5% respectively year-to-date and, furthermore, there could be more gains to come.
Indeed, with the two banks having different strengths when it comes to reasons to invest, they could prove to be a potent combination in Foolish portfolios. Here’s why.
Value
When it comes to cheap shares, RBS is tough to beat. Despite the worst of the banking crisis now being a distant memory, shares in the bank still trade on a ludicrously low price to book ratio of 0.4. This means that every £1 of net assets in RBS can be purchased for just £0.40 and, while at the height of the credit crunch this made some sense, with asset write downs being much lower now than at any point in recent years (and therefore net assets being unlikely to fall significantly), it is becoming more and more difficult to justify such a low valuation.
Growth
Clearly, both banks have huge growth potential. However, over the next couple of years it is Santander that is set to lead the way. For example, it is forecast to grow earnings by 24% in the current year and by a further 21% next year. This means that Santander’s bottom line is expected to be an incredible 50% higher in 2015 than it was in 2013. Clearly, this rate of growth outstrips the vast majority of peers and shows that Santander remains a stunning growth stock.
Income
While RBS does not currently pay a dividend, it has considerable income potential. Indeed, with sector peers such as Lloyds aiming to pay out 65% of profit as a dividend in 2016, the banking sector as a whole seems to be far less thirsty when it comes to cash requirements moving forward.
So, with RBS set to deliver earnings per share (EPS) of around 30p next year, a dividend yield of 4%+ looks to be very achievable over the next couple of years and, perhaps more importantly, is highly unlikely to put the bank on an uncertain financial footing.
Meanwhile, Santander currently yields a highly impressive 7.2% and, with earnings set to adequately cover dividends from next year, it appears to be a highly sustainable yield, too.
Looking Ahead
So, while both banks have their merits, a combination of the two could prove to be highly potent. While Santander’s growth potential is stunning and its yield is also highly enticing, RBS’s super-low valuation and income prospects make it a strong buy, too. As a result, a mix of the two stocks could turn out to be a very profitable partnership over the medium term.
