Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) has delivered the goods for shareholders over the last three years, climbing 152%, while its bailed-out peer Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) has delivered a miserly 35% rise.
Lloyds outperformance has continued in 2015: so far this year, Lloyds shares are up 5%, while those of RBS have fallen by 12%.
After such a strong performance, I think its important to review the situation: markets are forward looking, and much of the good news weve seen from Lloyds was priced into the banks shares before it actually happened.
I think that theres a possibility that RBS could start to deliver serious gains over the next year, as two key catalysts a return to private ownership and the resumption of dividend payments draw nearer.
In this article Ill take a closer look at each stock.
68% upside?
Lloyds is currently valued at 1.2 times its net asset value, whereas RBS trades at just 0.7 times book value.
Re-rating RBS shares to the same price/book ratio as Lloyds would deliver a 68% gain for RBS shareholders, but I dont think this is realistic.
RBS has a costly investment banking operation, and a history of big asset write-downs and disposals. The banks book value has fallen by 30% since 2009, whereas Lloyds is unchanged.
In my view, a further reduction in RBSs book value is likely this year. I also think that RBSs investment bank means that the RBS group may be valued at a discount to Lloyds simple, profitable high street banking business.
Earnings contrast
The differences dont stop there.
Despite trading on a lower price/book ratio than Lloyds, RBS has a higher P/E valuation, and is expected to deliver lower adjusted earnings per share (eps) growth in 2015 and 2016:
Lloyds Banking Group |
Royal Bank of Scotland |
|
2015 forecast P/E |
10.1 |
11.7 |
2015 forecast eps growth |
+109% |
+45% |
2016 forecast eps growth |
+6.3% |
-3.2% |
Theres little good news for RBS shareholders here, but what about dividends, the hope of which powered much of Lloyds share price recovery?
Dividend comparison
Heres how the two companies compare in the dividend department but keep in mind that unlike Lloyds, RBS hasnt yet got permission to restart dividend payouts:
Dividend yield |
Lloyds Banking Group |
Royal Bank of Scotland |
2014 actual |
0.95% |
0% |
2015 forecast |
3.5% |
0.3% |
2016 forecast |
5.4% |
2.6% |
Todays best buy?
At the start of this article, I suggested that it might be time to switch out of Lloyds and into RBS. However, having looked more closely at the figures, Im not convinced.
In todays market, I think Id rather own shares in Lloyds than RBS.
However, banking shares are extremely difficult to value.
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Roland Head 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.