This Is Still the Best Bank to Own

Despite the fact that the sovereign debt crisis in Europe has faded slightly from the headlines, the risk is still out there. It sits on the balance sheets of the world's largest banks and hangs from the corridors of buildings with nervous employees.

Still No. 1
For those looking to find a contrarian play in the banking sector, Europe is an obvious place to look. Investors are scared of sovereign defaults, and the EU stress tests did little to alleviate their fears. Last month, I penned an article telling you why one particular bank was the one I wanted to own today. That bank is Banco Santander, and here were the main reasons for my optimism:

  • Despite anxiety in the marketplace, Santander has been on a buying spree, scooping up retail branches, auto loans, and stealing market share in Spain by the handful.
  • The company has a long history of conservatism and completely avoided the U.S. subprime debacle.
  • It's trading cheap and has a great tier 1 ratio of 10%.

I have also asked Foolish readers which bank they'd most like to own. The results were mixed, although there did seem to be a favorable bent for Santander. To dig a bit deeper, I decided to provide some additional information and ask readers again, the second time around, who'd they most like to own.

Beyond the surface
Due to the problems facing the EU, it's no surprise that most banks are trading reasonably. However, bang for your buck is only one way to evaluate institutions. The other metrics I've included are each banks tier 1 capital ratio under normal circumstances vs. adverse/shock circumstances, in addition to the percentage of non-performing loans on a bank's books. This should be able to shed some light not only on how sound a company's price may be, but also on the quality of assets for each institution.

Check out the results below:

Company

P/E

P/B

Tier 1 Ratio

Tier 1 Ratio (Adverse)

Non-performing loans %

Banco Santander (NYSE: STD  )

9.4

1.9

10%

10%

3.5%

National Bank of Greece (NYSE: NBG  )

10.6

1.2

11.3%

7.4%

6.4%

Bank of Ireland (NYSE: IRE  )

N/A

0.5

9.2%

7.1%

12.5%

Allied Irish Bank (NYSE: AIB  )

N/A

0.2

7%

6.5%

23.8%

Deutsche Bank (NYSE: DB  )

5.8

1.1

12.6%

9.7%

3.1%

Lloyds Banking Group (NYSE: LYG  )

N/A

1.4

9.6%

9.4%

9.5%

Banco Bilbao Vizcaya (NYSE: BBVA  )

9.6

1.7

9.4%

9.3%

4.3%

Sources: Committee of European Banking Supervisors; Capital IQ, a division of Standard & Poor's. N/A = not applicable.

Notwithstanding its high price-to-book ratio, Banco Santander still looks like one of the best bets in this bunch. Its core tier 1 ratio is virtually unchanged when running the EU's sovereign shock and adverse scenario, which is quite comforting. It also has the lowest amount of non-performing loans as a percentage of total loans, besides Deutsche Bank. When comparing those two, though, you have to consider Santander's growth potential (12.5% annually over long-term) versus that of a behemoth like Deutsche Bank (5% annually over the long-term).

Another bank of definite interest is the National Bank of Greece. To learn more about that opportunity, check out this write-up by our Global Gains Advisor, Tim Hanson.

In my opinion, if you're looking to take a small portion of your cash and make an investment with much upside as well as much volatility, then Santander and National Bank of Greece are the two best avenues to explore.

Jordan DiPietro owns shares of National Bank of Greece. The Fool owns shares of National Bank of Greece SA. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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