Head To Head: Lloyds Banking vs Royal Bank Of Scotland

Published in Investing on 18 October 2012

Which of the FTSE's taxpayer-owned banks is the better buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are Lloyds Banking (LSE: LLOY) (NYSE: LYG.US), in which UK taxpayers have a 40% interest, and Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), which is 82% taxpayer-owned.

Fears about the global economy and the sovereign debt crisis in Europe have eased somewhat of late and the FTSE 100 is up 5% over the past three months.

Among the UK's banks, Lloyds and RBS, in particular, have been beneficiaries of the market's more optimistic outlook. Lloyds' shares have soared by 43% over the period and RBS's by 37%.

Let's take our seats at ringside.

Round 1: earnings

Recent share price42p285p
2012 forecast price-to-earnings (P/E)25.313.8
2013 forecast P/E11.711.7
2013 forecast eps growth (%)11818
Forecast operating margin (%)157

Sources: Digital Look, company reports. Winners in bold.

Lloyds takes the first round, scoring two points -- for forecast EPS growth and operating margin -- while RBS scores one point, for current-year forecast P/E. On perhaps the most useful number -- forecast P/E for 2013 -- the companies stand toe-to-toe and share the point.

Round 2: dividends

2012 forecast dividend yield (%)00
2013 forecast dividend yield (%)0.70.6
2013 forecast dividend cover12.415.3

Sources: Digital Look, company reports. Winners in bold.

Round two is all square with Lloyds and RBS each scoring one point outright and sharing one. The shared point results simply from the fact that neither company currently pays a dividend.

The analysts' consensus is for Lloyds and RBS to resume dividends at a low level in 2013. The narrow margin between the yields and the scope for the reality to deviate markedly from the forecasts, given the room afforded by the high forecast dividend cover, makes the figures in this round pretty unreliable.

Round 3: balance sheet

Price/Book (P/B)0.60.2
Core tier 1 capital ratio (%)11.311.1

Sources: Digital Look, company reports. Winners in bold.

In the final round, the companies again share the points. The contest ends in two drawn rounds and one win to Lloyds. The overall points tally is Lloyds five and RBS four.

Post-match assessment

Lloyds and RBS came into the contest like two punch-drunk fighters whose fortunes are beginning to be revived under new coaching and training regimes. Both companies are certainly in better shape than they've been in for a long time and their performances in this contest would seem to bode well for the future.

However, the P/E of 11.7, on which the pair shared the point in round one, doesn't give them the strongest case as 'contenders' from an investment perspective, while round two -- the dividend round -- was a decidedly scrappy affair.

More encouragingly, in round three, the companies' P/B ratios are well into bargain territory on the face of it. However, much depends on the reliability of the asset valuations, and on the odds -- and effects -- of any further shocks to the financial system.

Ace City investor Neil Woodford, who famously got out of banks and most other financial companies before the 2008 meltdown, is one shrewd cookie who continues to steer well clear of the sector.

Woodford's funds have beaten the wider market by over 300% in the last 15 years. If you're interested in discovering where Woodford is currently putting the billions he manages, I recommend you check out the exclusive Motley Fool report "8 Shares Held By Britain's Super Investor". You can download the report for free right now. Simply click here.

Investing is by no means easy in today's uncertain economy. That's why we've published “Top Sectors Of 2012” -- our guide to three favourable industries for 2012 and beyond. This free report will be dispatched immediately to your inbox.

Further investment opportunities:

> G A Chester does not own shares in any of the companies mentioned in this article.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

closetspeculator 18 Oct 2012 , 10:55am

Personally I would prefer BARC:

PTBV of 0.65
PE of 8.58
Div of 2.8%

57degreesnorth 19 Oct 2012 , 2:23pm

Neither of their ordinaries, but their prefs and sub-debt still looks attractive

goodlifer 20 Oct 2012 , 12:37pm

"Woodford's funds have beaten the wider market by over 300% in the last 15 years."

What exactly do you mean?

Can you tell us precisely what profit he's actually made?
It's high time you Woodford-pluggers came clean about what your super-investor's actually achieved.

M0byDick 20 Oct 2012 , 1:27pm

Hi goodlifer

Over the 15 years to December 2011, the returns (with dividends reinvested) are as follows:

FTSE All-Share: 42%
Woodford's Income fund: 335%
Woodford's High Income fund: 347%

You can learn much more about Woodford's returns and his highly successful approach to investing in the free Motley Fool report "8 Shares Held By Britain's Super Investor" (click on the link in the article).

Foolish best
MobyDick (G A Chester - article author)

goodlifer 20 Oct 2012 , 8:05pm

Thank you M0byDick,

If your figures are correct, the growths of the funds you mention are about 8.39% and 8.6% per year compound.
Not too bad, I suppose, but less than I'd expect from a full-time professional.

Don't forget that, according to the Motley Fool, Berkshire Hathaway's stock price has had a compound growth rate of 27.5% from 1967 through 2007, while Stephen Bland's Doris managed 11% over roughly the same time by doing absolutely nothing.

And Ben Graham's on record as saying a reasonably intelligent doctor should make around 15% plus dividends.

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