Seven years on from the financial crisis, many investors are still finding it difficult to trust the banks, despite the progress the sector has made over the past few years.
Butits easy to see why investors remain cautious most banks are almost impossible to understand. Complex balance sheets and shady investment banking divisions have confused some of the worlds top banking analysts. The average private investor stands no chance.
However,Lloyds(LSE: LLOY) andSantander(LSE: BNC) are two investor friendly banks, which are easier to understand and analyse than their complex peers.
Slimming down
Lloyds has worked hard to slim itself down over the past five years and return to a simple banking model, which reminds me of the 3-6-3 business model.
The 3-6-3 business model was an unofficial rule of banking,introduced in the 1950s. Simply put, this ruledescribes how bankers would give 3% interest on depositors accounts, lend the depositors money at 6% interest and then be playing golf at 3pm.
Of course, in todays world its not possible to operate a bank inquite that way, but Lloyds is trying very hard to go back to basics. For example, Lloyds investment bank has, for the most part, been sold off and wound down. Moreover, management has done its best to remove risky assets from the banks balance sheet.
This return to simplicity is also having a positive effect on Lloyds cost base and return on equity (ROE) a key measure of bank profitability. The bank is targeting a ROE of 13.5% to 15% by 2017, and its already well on the way to this target.
Underlying ROE hit 16% during the first quarter of this year, while many of the banks peers reported ROE figures in the low-teens.Further, the groups cost:income ratio dropped to47.7% during the first quarter of this year. More complex banks like Barclays and HSBC reported cost:income ratios of 62% and 55% respectively during the first quarter.
Unfortunately, Lloyds recovery and simplicity has not gone unnoticed, and the banks valuation has jumped over the past few weeks. Lloyds now one of the most expensive large banks in the world, trading at aprice-to-tangible net asset value of 1.5. Many of Lloyds peers trade at a P/TNAV of less than 1.
A different breed
Admittedly, Santander is more complex than Lloyds. Indeed, Santander is a global bank with a European focus while Lloyds is solely focused on the UK.
Nevertheless, whats really attractive about Santander is the banks record of compliance, or, to put it another way, the lack of hefty fines stemming from illegal activities. Further, Santander was one of the few large banks that didnt need a bail-out during the financial crisis, despite its exposure to the Spanish property market.
This record of good performance puts the bank head and shoulders above many of its peers, and customers have flocked to Santander as a result. In particular, the number of Santanders current account customers in the UK has tripled over the past three years.
And Santander is willing to do things differently to stand out from the crowd, appeal to customers and safeguardinvestor interests. Santanders goal to assist, rather than punish, indebted customers helped the group report a41% net increase in earnings within Brazil during the first quarter, where a sharp economic slowdown has strangled the growth of the banks competitors.
City forecastssuggest that Santanders earnings will expand by 14% during 2015, and a further 12% during 2016.These figures suggest that the bank is trading at a forward P/E of 12 and 2016 P/E of 10.9.
Driving force
So, all-in-all, Santanders different way of doing things gives the company market-leading qualities. And the banks strong management team is the driving force behind its strong rapport with customers.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
