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Should I Buy Royal Bank of Scotland Group plc (ADR) (RBS) or Lloyds Banking Group PLC (ADR) (LYG)?

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RBS Rolls Out Five Rogers Enhanced Commodity ETNsLONDON — Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) and Lloyds Banking Group PLC (ADR)(NYSE:LYG) were both forced into humiliating tax-payer funded bailouts during the financial crisis — and last week, both banks reported hefty losses for 2012, suggesting that they haven’t yet managed to put their problems behind them.

I believe that both banks will eventually recover and that it’s only a question of time until the government sells its shareholdings back into the private sector.

Today, I’m going to look at both banks to see which offers the greater potential for new investors.

RBS vs. Lloyds
I’m going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their 2012 results:

RBS Lloyds
Price to tangible book value 0.69 0.94
Core Tier 1 ratio 10.3% 12%
Group net interest margin 1.93% 1.93%
Group loan to deposit ratio 100% 121%

Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) remains — in theory at least — a strong value play, trading at around 69% of its tangible asset value, whereas Lloyds’ share price has pretty much caught up with its book value, leaving very little upside in this area.

However, both banks are continuing to sell off non-core assets, and Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) especially is likely to do more in this area over the next year, meaning the underlying book value of the business could shrink further.

Looking at the other statistics, Lloyds Banking Group PLC (ADR)(NYSE:LYG) has moved ahead of RBS with a substantially higher core tier 1 ratio and a stronger group loan to deposit ratio, which gives it the ability to extend its lending when attractive opportunities arise, without compromising the security of its balance sheet.

What’s next?
Are the trends we identified above about to change, or should we expect more of the same?

Analysts’ forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let’s take a look at some forward-looking numbers for RBS and Lloyds Banking Group PLC (ADR)(NYSE:LYG). These apply to the companies’ 2013 financial years:

RBS Lloyds
Forecast P/E ratio 12.8 11.3
Forecast dividend yield 0.4% 0.6%
Forecast earnings per share 24p 4.5p

These figures, which are based on the companies’ guidance figures and analysts’ consensus forecasts, suggest that both banks are expected to return to profit in 2013, ending the run of impairments and exceptional charges that drove both of them into the red in 2012.

Analysts are also hoping that dividend payments will begin — although even if it is financially prudent, this will be a politically sensitive subject, and I wouldn’t be surprised if dividends get postponed until 2014.

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