With centuries of experience, these banks have been crucial in developing the British economy as you know it today. They have funded businesses throughout the country and have helped elevate the economy. 

As a result, the top UK banking shares today offer strong dividends and steady growth. And over the years they have become the pillars of the investment community in the country.

We’ll break down what beginner investors need to know to explore and invest in the thriving UK finance sector, by looking at the top five banking shares in terms of market share. 

What are bank shares?

Bank shares are publicly listed companies that provide a broad range of financial services to the public and businesses alike. 

Common operations include maintaining accounts and providing loans, mortgages, and asset management services. Banking groups also provide secure transactional pathways that enable account holders to pay and receive money via instruments like credit cards, debit cards, and digital transfers.

Top UK banking shares

Here are some of the top UK banking shares in order of highest market cap.

1.  HSBC Holdings 

The European banking giant, established in Hong Kong in 1865, has grown to become a huge force in the field. Currently, HSBC Holdings (LSE:HSBA) has the highest total assets of all major European banks, worth over $15trn. And the banking firm now has a new area of focus and a new strategy that looks exciting on paper. 

In the midst of the pandemic in 2021, HSBC announced that it was switching focus to the growing Asian markets while slowly withdrawing from Britain and the US. This led to the banker cutting over 35,000 jobs and acquiring smaller banking groups in countries like Singapore and India, further cementing its Asia-first strategy. 

And the move as already proven to be a successful switch for the banker. In July 2022, HSBC announced that it had become the first foreign lender to open a Communist Party of China committee in its Chinese investment banking subsidiary. While this move has been criticised by regulators in the UK, investors see this as a strong move that could open up a vast, economically affluent market.

As of July 2022, HSBC shares have regularly outperformed the FTSE 100 index. While this is not an indicator of future returns, 2022 has been a very turbulent economic period. This banking share’s ability to navigate choppy waters is impressive.

2.  Banco Santander SA

Banco Santander (LSE:BNC) or Santander Bank as it is known in the UK, is the 16th largest multinational bank in the world. It is one of the biggest bankers listed in the LSE today and has a huge presence in South America. It is also expanding slowly into the emerging Asian market as well. 

Santander’s priority over the last few years has been customer acquisition. Its campaign has proven successful, adding 32m new customers since 2015 and taking its total customer base to 153m. During this growth, the business has been maintaining a steady operating income that hasn’t dipped below €20bn since 2008.

And profits have been increasing too. In fact, 2021 was the most profitable year for the bank in its history, bringing in €15.3bn, thanks to strong business momentum across most regions. The company is also seeing loan approval rates go up in cash-rich regions like Europe and the US. The repaying ability of the average citizen in those regions is much higher than in Santander’s developing markets, which is a sign that recurring revenue growth could be high over the coming years. 

Santander shares might be lagging behind some of the other companies on this list when it comes to digital banking services. But it is making good strides and is actively developing a range of digital banking services. In 2021, 54% of its total sales were through its digital channels.

3.  Lloyds Banking Group 

As a mainstay of the British finance sector, Lloyds Banking Group (LSE:LLOY) is the most recognised bank in the UK. Since its operations are highly focused around Britain, Lloyds shares and its performance are seen as a barometer for the larger UK economy.

The cash-rich banker is looking to diversify its assets. Since a large majority of its income is from mortgage lending, the banker decided to enter the real estate market in full force in 2021. A partnership with top UK real estate developer Barratt Developments will see the bank acquire 50,000 plots by 2030, making it a top 10 developer in the region. 

Diversifying assets is crucial for UK banking stocks to avoid the pitfalls of recessions. The only way banks can offset losses from payment defaults is to invest their excess cash effectively. And despite falling housing prices, this move may open up a whole new market for Lloyds to explore over the next decade. Offering prepackaged loans for houses developed by Lloyds could become a unique sales pitch that could draw young buyers.

4.  Barclays

This universal British banker offers banking and investment solutions across the globe. With a strong presence in the US as well as top economies in Europe, Barclays (LSE:BARC) is one of the most recognised names in the world of finance. 

The firm has made between £5bn and £8bn a year since 2018 on credit card payments alone. It also has a thriving business banking division and is a highly digitised business offering cutting-edge mobile banking solutions. Its banking app is one of the most downloaded in the western world with 10m users (as of 2021) and 3bn+ logins.

This FTSE 100 bank share’s poor performance across 2022, given the economic turbulence in the UK, has made its valuation incredibly attractive. It is currently one of the cheapest blue-chip banking stocks listed on the LSE. But investors and the board alike are sure that Barclays, like most top banking shares, will make a strong comeback as things get better.

5.  Natwest Group 

The final banking share on our list is no slouch. Natwest Group (LSE:NWG) is the largest business banker in the country. Supporting over 19m customers in the UK, Natwest aims to provide cutting-edge banking solutions and also has lofty environmental sustainability goals.

In fact, Natwest announced its Green Mortgage product, with £728m of lending allocated to champion green businesses. The bank supports several businesses that are helping other businesses meet their environmental goals as well. Natwest’s digital offerings are popular too. Over 60% of its retail current account holders interact with the bank only through digital mediums. 

On the business side, 2021 was a great year for Natwest. Total lending values grew by £7.8bn, primarily driven by mortgages. While this UK share has struggled like every other financial institution in 2022, over the last 12 months of trading, Natwest shares have risen over 15%. This places it second in terms of returns compared to all other banks on this list (behind HSBC). 

This shows investor confidence when the FTSE 100 index has been struggling for stability. And looking at Natwest’s historic dividend growth and the average yield of 4.5% across 2022, it is clear why investors favour this banking share over others.

Why are UK bank shares falling in 2022?

In 2022, markets worldwide have witnessed huge collapses. It is clear now that the economic impact of the pandemic will be drawn out. And the UK is in a particularly vulnerable state right now due to rising geopolitical tensions in Europe and the ever-changing energy lobby. 

Rising costs have raised inflation throughout the year and are expected to outstrip 11% by the end of 2022. As a result, banking shares have become a hot topic of debate right now as the Bank of England mulls further interest rate hikes. While some big lenders like Lloyds stand to benefit from higher interest payments in the short term, investors are still concerned about the spending power of the average citizen if the UK enters a recession. 

Forcing consumers to save every penny creates a bad business environment, especially for banks. Most banks make money for every transaction and thus stand to make less in a recession. Historically, a period of poor economic growth is marked by banking stocks falling fast. Also, in a recession, payment defaults could increase, which is a liability. 

Will banking shares recover?

The data shows that finance shares are the first ones to recover from a crash because banks tend to invest right, be cash-rich, and use governmental support to recover losses quickly. 

All the banking shares discussed on this list are considered blue-chip finance stocks with huge cash reserves and assets. And even in an economic downturn, banking services will be essential. Even after the crash in 2020, the banking stocks on this list have shown strong signs of recovery and are steadily posting better results every quarter.

If you are looking to add UK banking shares to your portfolio as a growth option or for passive income, these bankers are a great starting point. By understanding how these top banking shares are different, new investors can understand the fundamentals better and know what to expect from an investment in banking shares in the UK. 

Go for gold

Having gold exposure is a popular strategy for many investors. The yellow metal often rises during economic, political and social crises. This can help prevent individuals’ investment portfolios from getting washed out in difficult times.

I think buying gold-producing shares is the best way to get this exposure. And I’d do this by investing in FTSE 250 stock Centamin (LSE: CEY).

I’m encouraged by the company’s plans to turbocharge production at its Sukari mine to 500,000 ounces per year. The business is on track to dig between 430,000 and 460,000 gold ounces in 2022.

It’s also taking big steps to reduce costs. Last week it began the final stages of commissioning a solar plant at its Egyptian mine. The plant is already “delivering savings ahead of expectations”, Centamin said.

I also like the exceptional all-round value that the miner’s shares provide today.

The FTSE 250 company trades on a forward price-to-earnings (P/E) ratio of 8.2 times. Meanwhile its dividend yield sits at 5.6% and 6.3% for 2022 and 2023 respectively.

Searching for, developing, and producing from mineral deposits are all complex processes. This allows for a broad range of problems that can happen anytime to push up costs and hammer revenues.

But on balance I think that the potential long-term rewards of owning Centamin shares make it a great buy.

Latin fever

Owning banking stocks such as Banco Santander (LSE: BNC) can be a bumpy ride.

Earnings for such stocks are highly attuned to the broader economic conditions. This means that share prices can slump when times get tough. Dividends can also take a whack during difficult periods.

Santander last week underlined the problems it is facing. Head of its UK business Mike Regnier told The Guardian newspaper that the number of people falling behind on mortgage, loan and card payments is increasing.

But as a long-term investor I’m still considering buying Santander shares.

A sinking share price leaves the business on a forward P/E ratio of 4.8 times. Its 2022 dividend yield meanwhile sits at an enormous 6%.

This offers exceptional value, in my opinion. I think the Spanish bank will soar from current levels once the global economy recovers and banking product demand in Latin America steadily grows.

Santander has operations in major South American economies including Brazil, Mexico, Chile, and Argentina. It is investing heavily in these developing regions too to turbocharge future earnings growth.

An explosion in fintech platforms underlines in part how fast demand for financial products is growing. The number has more than doubled in Latin America between 2018 and 2021 to reach 2,482 last year.

Santander’s shares trade on a forward P/E ratio of 4.8 times. Meanwhile its dividend yield for 2022 sits at 6%. This all makes the bank a highly attractive value stock right now.

NextEnergy Solar Fund

Investor interest in renewable energy stocks like NextEnergy Solar Fund (LSE: NESF) is accelerating sharply. This particular green share’s share price has exploded since its IPO in 2014 and just hit new record highs.

It’s not a mystery as to why they are becoming so beloved. Demand for clean energy is soaring as the fight against climate change intensifies. NextEnergy Solar owns around 100 assets that generate energy using the power of the sun.

The majority of these are located in the UK with a small number situated in Italy. And the business is expanding rapidly to maximise its position in this growing market. Its total installed capacity rose to 865MW from 814MW a year earlier.

The trouble with investing in renewable energy stocks is that energy production can be intermittent. In other words, they can stop producing electricity during adverse weather conditions, causing a negative impact on profits.

But all things considered I think NextEnergy Solar’s a great buy for long-term passive income. Solar energy demand is tipped to explode over the next decade (S&P Global analysts think solar and wind capacity will soar 47% in the decade to 2030).

What’s more, NextEnergy Solar’s essential operations mean that profits will remain stable even during downturns. This means it should have the financial strength to pay big dividends at all points of the economic cycle.

Banco Santander

The Banco Santander (LSE: BNC) share price meanwhile has slumped sharply in 2022. It’s a fall that reflects its highly cyclical operations and the prospect of profits crashing as the global economy cools.

Santander’s share price has been especially weak over the summer too. This is because of severe commodity price falls and the economic strain this will cause in Brazil. This is comfortably the bank’s single largest market by profits and customer numbers.

Yet despite these issues, I’m hugely tempted by the bank’s excellent all-round value. In particular I think its 7.3% dividend yield makes it a terrific way to boost my passive income. Santander’s strong dividend cover suggests it’s in great shape to make the full dividend payment that brokers are expecting.

I’m also consider Santander as a great way to boost my exposure to emerging markets. The bank’s broad geographic footprint — spanning The Americas and Europe — gives it extra resilience through diversification. And it provides access to the fast-growing Latin American region where product penetration is low and wealth levels are tipped to grow strongly.

Santander currently generates around 31% of underlying profits from Latin customers.

Centamin

Buying gold stocks remains a good idea in my book as prices rocket and economists raise their inflation forecasts.

This week, Bank of England (BoE) policymaker Michael Saunders was the latest to warn of the strain. He said: “Inflation pressures would probably be greater and more persistent” than the BoE expects, if further rate rises are not forthcoming.

This comes just days after the BoE said consumer price inflation would hit 10% in 2022.

The big question is if the BoE (like other central banks) will be able to hike rates as aggressively in the months to come as global growth grinds to a halt. I’m not so sure they will.

As I said, buying gold mining stocks could be a good idea amid this high prospect of low growth and high inflation (or ‘stagflation’). And Egypt-focussed Centamin (LSE: CEY) is one on my radar, thanks to its 5.3% dividend yield.

I must remember though, that resurgent safe-haven buying of the US dollar could harm Centamin’s profits. A rising greenback essentially makes it more expensive to buy gold, hitting metal demand from investors.

Glenveagh Properties

Ireland’s shortage of new housing is vast. Even as interest rates rise, homes demand continues to outpace supply, supporting strong trading for the country’s homebuilders.

Glenveagh Properties (LSE: GLV) is a case in point. In late April’s trading update, the business said it continues to witness “strong demand” for its homes. Revenues rose 105% at Glenveagh back in 2021, thanks to higher completions (up 64%) and climbing property prices.

Pleasingly, Glenveagh’s boosting production to make the most of these fertile trading conditions too. It is on track to deliver 1,400 suburban homes in 2022, up from the 1,150 completions it sealed last year.

However, I am concerned about the impact of rising raw material and labour cost on Glenveagh’s bottom line. But as of today, the business continues to bat back against these pressures. It said last month that “the underlying strength of the market and [our] attractive product offering” means house price inflation continues to outpace cost rises.

Today, Glenveagh carries a mighty 6.5% dividend yield. I expect dividends here to impress long beyond 2022 as well.

Banco Santander

Investing in economically-sensitive shares like banks is risky business today as global growth cools.

However, some financial industry stocks are so cheap that I think they represent attractive value. Banco Santander (LSE: BNC) is one such stock that has caught my attention with its excellent all-round value.

For 2022, Santander trades on a forward price-to-earnings (P/E) ratio of around 5.1 times. The banking giant also carries a mighty 6.9% dividend yield.

As a long-term investor, Santander has plenty of appeal for me. This is because the company has significant exposure to Latin America. And it’s stepping up investment there to capitalise on soaring demand for financial products.

In December, it announced plans to spend $6bn on digital transformation there between 2022 and 2024. It said the investment would “expand operations and further improve customer service” in the region.

Rising personal incomes are supercharging demand for loans, bank accounts and similar services. Yet product penetration here remains low, giving Santander colossal sales opportunities. Researchers at McKinsey & Company have said they expect Latin America “to remain the growth leader in banking” and for banking penetration rates to keep climbing.

Antofagasta

FTSE 100 mining stock Antofagasta (LSE: ANTO) is another stock I’d buy for its big dividends today. The yield here for 2022 sits at a tasty 5.5%.

Unlike Centamin — whose share price could rise strongly in the near term alongside gold prices — Antofagasta is in danger of slipping as stagflation sets in. Copper is an economically-sensitive commodity and prices could slip sharply, pulling Antofagasta’s profits down in the process.

Particularly concerning are signs of economic strain in China. Fresh Covid-19 lockdowns are hitting the country hard and latest data showed exports hit two-year lows. Worringly for Antofagasta, China accounts for half of all copper demand.

However, I’m someone who invests in stocks based on their long-term outlook. And I think Antofagasta is looking good as the green revolution clicks through the gears.

Soaring demand for electric vehicles (and associated infrastructure) and renewable energy technology look set to supercharge copper consumption this decade. Antofagasta can also expect demand for its metal to light up as global construction rates soar and sales of consumer electronics boom.

Goldman Sachs thinks copper demand will soar 600% between now and 2030.

Royal Mail

Royal Mail’s (LSE: RMG) share price has fallen heavily during the course of 2022. This has pushed the dividend yield up to a robust 7%.

I think this makes the FTSE 100 firm a screaming buy. That’s even though there are risks facing Royal Mail in the near term and beyond. E-commerce sales have fallen sharply from Covid-19 levels, hitting parcels traffic at the courier. Conditions could remain tough too as the cost of living crisis hits consumer spending.

There’s also the problem of high restructuring costs as Royal Mail adjusts to the digital shopping era. The threat of industrial action is also never far away.

But it’s my opinion that Royal Mail still remains a top buy today. I think traders and investors have been quite short-sighted in selling the stock so heavily. E-commerce in the UK is set for strong and sustained growth following this post-pandemic adjustment.

Analysts at Worldpay think the British e-commerce market will grow 26% between 2021 and 2025 to $260bn. Demand for Royal Mail’s services should rebound strongly, in my opinion.

Forget about Lloyds!

I’m happy to ignore UK-centric banks like Lloyds and Natwest. To my mind, the prospect of weak GDP growth in Britain over the next several years makes them unattractive stocks to buy today. I could be wrong, of course, but I’d much rather invest in banks that offer their services in fast-growing emerging economies. One such stock I’d happily load up on today is Banco Santander (LSE: BNC).

Let me put in an early disclaimer here. Like Lloyds and other domestic operators, Santander faces significant danger in the near term as Covid-19 drags on and inflation soars. The company has an extensive footprint in Latin America where economic conditions are deteriorating sharply.

In Mexico, for example, the economy has just moved into a technical recession, partly due to ongoing supply chain issues. Meanwhile in Brazil — a market from where Santander generates around 28% of underlying profit — is already in recession.

Conditions there are tipped to worsen before they improve too, as political uncertainty rises ahead of October’s presidential election and inflation rockets.

One of the best banking stocks to buy?

As a long-term investor I’m still considering buying Santander shares however. That’s because I expect demand for its banking products to recover strongly as the decade progresses. I certainly believe sales growth will be more impressive than at Lloyds, for example.

Financial services penetration in Latin America remains extremely low versus developed markets. This gives the likes of Santander plenty of business to win as wealth levels in the region balloon.

Analysts at McKinsey & Company have said that “the Latin American banking market is among the fastest growing in the world”. This gives Santander enormous opportunity, given its high profile in these fast-growing territories. The bank sits in the top three banks by market share in key Latin American economies Brazil, Mexico, Chile and Argentina.

A top electric vehicle stock

Therefore I think Santander could enjoy excellent earnings growth in the next 10 years. And I believe the same could be said for Chargepoint (NYSE: CHPT) too. Why? This US share provides charging points that keep electric cars running. It operates this infrastructure in North America and Europe as so is well-placed to exploit the global EV boom.

On Monday, luxury car builder Aston Martin announced it will only sell battery-powered and hybrid vehicles from 2026. It’s one of many major manufacturers who are stepping up investment in EVs and illustrates the bright sales outlook for low-carbon vehicles. Analysts at BloombergNEF think they could command a 24% market share of all vehicles in the US by 2026, moving to 50% by 2030.

But Chargepoint could suffer some near-term trouble if supply chain issues continue to hit EV production. This problem would affect the use of its charging points by drivers. However, as someone who looks at investing from a long-term perspective, I’m still considering buying the business right now.

• The Santander share price appears cheap 
• With interest rates rising, the firm’s profits look set to rise 
• The international footprint gives it a competitive edge 

I think the Santander (LSE: BNC) share price is one of the most overlooked investments in the UK financial sector. 

When investors and analysts look at the UK financial sector, they tend to focus on local peers such as Lloyds, which is a mistake in my view.

Indeed, unlike Lloyds and NatWest, the company has a much larger international footprint. This could act in its favour as the global economic recovery builds over the next 12-24 months. 

Company outlook 

Over the past year, the Santander share price has struggled to move higher. The stock has traded in a range of between 220p and 300p. Overall, excluding dividends paid to investors, the shares have added 8%. Meanwhile, Natwest and Lloyds have returned 57% and 54% respectively. 

The question is, why has the stock performed so poorly compared to its domestic peers? I think the firm’s sizeable European presence is to blame.

While the Bank of England has started hiking interest rates, which should enable banks to increase the rates they charge to consumers, in Europe, interest rates are nailed firmly below 0%. It does not look as if this is going to change anytime soon. 

Still, only a third of Santander’s underlying profit comes from Europe. The South American and North American markets make up another 60%. Digital services make up the remainder. 

And it is not as if the low-rate environment is holding the business back. For the third quarter of 2021, the firm reported a near 100% increase in European profits. Overall, the underlying profit before tax was €11.4bn in the first nine months of the year, up 74%. 

Santander share price opportunity 

I think this presents an opportunity for long-term investors. With profits surging and the Santander share price not reflecting this growth, the stock is starting to look cheap. At the time of writing, the stock is selling at a forward price-to-earnings (P/E) multiple of 7.1.

To put that into perspective, Lloyds and Natwest are trading at multiples of 8.5 and 10.3 respectively, giving an average of 9.4.

Still, as domestic UK banks, these businesses are not the best comparisons. A better option could be HSBC. This firm is one of the world’s largest international banks. Right now, the stock is selling at a P/E of 10.8. 

These figures show that Santander appears undervalued compared to its peers in the financial sector. 

However, some risks could hold the bank back in the near future. These include the potential for future economic disruption from the pandemic as well as rising wage inflation around the world. 

Despite these headwinds, I think the Santander share price looks cheap. As such, I would be happy to add the stock to my portfolio today. 

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.

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.

It’s easy to see why investor sentiment towards the lender has soured over the past few months. The coronavirus crisis has ignited one of the most significant economic slumps in history.

At this stage, it’s impossible to tell how much of an impact this will have on the European banking industry and how quickly the economy will recover in the months and years ahead. 

As such, there could be further pain ahead for the Santander share price. 

Santander share price under pressure 

Some banks around the world have reported a spike in loan losses over the past few months as the coronavirus crisis has wreaked havoc on the global economy. These lenders had to write off tens of billions of pounds in assets as a result. 

The Spanish banking giant is likely to face the same fate, which could have a substantial negative impact on the Santander share price. 

What’s more, the lender may also struggle to return to growth in the years ahead. Before the crisis, Santander was already struggling. Low interest rates have steadily eroded the group’s profit margins over the past decade, and its costs have remained stubbornly high. Unfortunately, interest rates have only fallen further over the past six months. This may make it harder for the Santander share price to recover when the crisis is over.

On the other hand, FTSE 100 dividend champion Admiral (LSE: ADM) appears to have a bright future.

Unlike Santander, the insurance giant doesn’t need high interest rates to make a profit. Moreover, the organisation is built around an online business model, so its costs have always been much lower. 

Avoiding the worst 

Admiral also seems to have been relatively unaffected by the coronavirus crisis. Its customers have been driving less, which means insurance claims have dropped. This may help the company report a better than expected trading result for 2020.

Considering the company’s advantages, it’s no surprise Admiral has outperformed the Santander share price this year. Shares in the group are changing hands at roughly the same level they started the year. 

And, unlike the Santander share price, Admiral also continues to offer a dividend for its investors. The payout for the full year is expected to yield somewhere in the range of 4-5%. 

As such, now would be a great time to sell the Santander share price and buy Admiral instead. Not only does the insurance group offer the potential for higher profit growth in the years ahead, but it also continues to pay investors an extremely attractive dividend.

As the outlook for the Santander share price continues to deteriorate, Admiral may be the better investment for the long term. 

My worry is that another hike in provisions could be on the cards and possibly as soon as next month, adding more stress to the FTSE 100 firm’s already-declining capital buffer. I also fear what a declining UK economy will mean for Lloyds’s top and bottom lines in that upcoming release. Pre-tax profits fell 4% in the first half amid a slight revenues drop and ballooning bad loans.

The month of October could spell disaster for Lloyds’s share price not just because of those scheduled quarterlies though. The UK also remains set to exit the European Union on that date with a deal or otherwise, of course, an event that could have significant ramifications for the domestic economy through the next decade. Indeed, the OECD recently predicted this could plunge the country into recession in 2020 and shave 3% off national GDP over the next three years.

Cheap but risky

There’s clearly a lot to fear with the Black Horse Bank and ample reasons to expect its share price, which has shrunk by around 20% from its 2019 highs hit in April, to continue to fall.

So I’m happy to ignore Lloyds despite its low valuation, a forward price-to-earnings ratio of around 7 times. It’s not low enough to reflect the possibility of near-term profit projections being blown off course, nor the possibility of a prolonged downturn in the retail banking market. Nor am I encouraged to buy due to the firm’s 6.3% corresponding dividend yield, given the growing pressure on the balance sheet.

I think ISA investors desiring a slice of the banking sector need to look for firms with little or no exposure to the UK economy, as well as those which don’t do their accounting in sterling. And, in my opinion, Santander (LSE: BNC) fits the bill perfectly. Today, it generates 11% of profit from these shores while it accounts in euros rather than the pound.

A better dividend buy

In fact, the bank is actually pretty-well diversified in terms of its geographical make-up, sourcing around 45% of profits from Europe, 38% from South America, and the remaining 17% from North America. This gives it the sort of strength which Lloyds would no doubt crave at the current time. In my opinion though, it’s the company’s rising might in Latin American countries which makes it such a great bet for long-term ISA investors.

Broad economic conditions might be a bit turbulent right now, but thanks to low financial services penetration in these markets, allied with explosive population growth and rising wealth levels, Santander can look forward to some exceptional earnings growth in the years ahead.

Now the FTSE 250 bank might not offer the sort of value as its Footsie 100-quoted rival, but it’s not far off. At current prices, it trades on 7.6 times forward earnings while it boasts a 6% dividend yield for 2019 too. And I reckon its low rating fails to illustrate its exceptional growth prospects over the next decade and beyond.

Already being battered by that dreaded combination of revenues stagnation and loan impairments, a perfect illustration of a rapidly-slowing domestic economy, things threaten to get even more troublesome if the UK ambles down the path of a destructive no-deal Brexit.

In recent days I explained why betting on Bank of Georgia may be a better choice in this climate for investors determined to grab a slice of the banking sector. But this is not the only financial giant I’d rather buy over Lloyds today — indeed, I also consider Banco Santander (LSE: BNC) to be a superior stock than the Black Horse Bank.

Key markets are flying

We all know about the terrific growth rates in emerging markets, a phenomenon that’s still driving trade at Santander, despite the impact of political and economic events on business in its traditional territories of the UK and mainland Europe.

This was abundantly clear in the bank’s robust first-quarter period, three months in which it saw excellent lending in key Latin American markets of Brazil and Mexico (and a stable-if-unspectacular performance from Chile) to nudge group income 2% higher at constant rates to €12.1bn.

The numbers again illustrated the brilliant pent-up demand for banking products in these fast-growing regions — in Brazil, for instance, retail loans and consumer finance bulged by double-digit percentages whilst deposits boomed by 14%.

They also underlined the massive progress Santander is making in the red-hot digital banking arena, the number of customers using such services leaping by 6.5m customers year-on-year to total 33.9m in quarter one. The recent launch of financial advice app Santander On and online investment platform Pi in its gigantic Brazilian marketplace certainly helped light a fire under customer numbers.

A Latin lovely

And judging from recent research by McKinsey & Company, Santander has a lot more to look forward to here. The management consultancy said that “we expect Latin America to remain the growth leader in banking,” noting that banking revenues in the territory have grown around 6% faster each year than the global average and more than any other region between 2012 and 2017.

More specifically, McKinsey predicts that total Latin American banking revenues will increase at a compound annual growth rate of around 10% in the next five years, excluding the cost of risk. And underpinning these likely increases will be the region’s “very low” banking penetration — only 30% to 50% of citizens over 15 years old have a bank account, the firm estimates, versus some 90% in the UK, US or Spain — as well as a young and expanding population facilitating quicker growth.

The long-term outlook for Santander, then, looks a lot more robust than over at Lloyds, where the prospect of a no-deal Brexit is casting a suffocating cloud. Indeed, my view of the bank’s likely profits generation became a lot dimmer following an Office for Budget Responsibility report released last week.

So forget about Lloyds and predictions of more big dividends, I say. I’d much rather grab Santander and its 5.6% forward yield.