Should I Sell RBS and Buy Barclays?

LONDON -- Banking giants Royal Bank of Scotland (LSE: RBS  ) (NYSE: RBS  ) and Barclays (LSE: BARC  ) (NYSE: BCS  ) are both constituents of the FTSE 100 (UKX) index. RBS suffered the worst during the financial crisis, requiring a huge bailout that saw the government become its largest shareholder. Barclays did not receive a taxpayer bailout but has been damaged recently by the LIBOR scandal.

As investors, we should always be looking to optimise our capital. This can mean selling a share that is still cheap and putting the money into something that is even cheaper. It would not be wise to hang on for a 15% gain when there the same chance of making 50% elsewhere.

Today I am going to compare a share I own (RBS) with one that I don't (Barclays).

Company Price (p) P/E (forecast) Yield (forecast, %) Market cap (£m)
Barclays 255.5 7.3 2.5 31,310
Royal Bank of Scotland 302 17.4 0 18,063

RBS and Barclays: head to head
Barclays managed to pay a dividend throughout the very worst of the financial crisis. RBS, however, had to cancel its dividend.

Barclays is increasing its dividend fast. A 7.3% rise is expected for 2012, to be followed by an 11.6% rise in 2013. Earnings are forecast to move upwards at a slightly slower rate.

RBS is the growth option. A massive sixfold increase in earnings per share (EPS) is forecast for this full year. That is then expected to be followed by a 59.7% rise in earnings in 2013.

Asset writedowns (impairments) will have a huge effect on RBS profits. If the U.K. (and Irish) economy recovers, profit forecasts could be upgraded significantly.

Share price movement
Despite the ups and downs, 2012 has actually been a good year for shareholders in RBS and Barclays. So far this year, shares in RBS are up 50.1%. Shares in Barclays have advanced 45.2%. Both have comfortably outperformed the FTSE 100 (UKX) which has risen just 6.2% in the same period.

Both shares currently trade at a high for the year.

The winner is...
As I already own shares in Lloyds Banking, I'd be reluctant to buy another bank without selling RBS or Lloyds first. Barclays' price-to-earnings (P/E) ratio is around 50% lower than its peers HSBC and Standard Chartered. If the new management team can prove themselves then there is significant upside potential.

RBS is the higher octane recovery play. Before the eurozone panic hit the market, RBS shares spent over a year trading above 400p. Payment Protection Insurance compensation has also hurt the bank.

Right now, the contest is finely balanced. I'll stick with RBS for the time being and continue to keep an eye on Barclays.

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