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Can Lloyds Banking Outperform Citigroup?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250 and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and, I feel, are outweighed by the investing potential of the American market.

Today, I'm going to take a look at two banks that were hit hard by the financial crisis but now appear to be on the road to recovery: Lloyds Banking Group  (LSE: LLOY  ) (NYSE: LYG  ) and Citigroup  (NYSE: C  ) .

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, Lloyds, or Citigroup?

Value Lloyds Citigroup
Current price-to-earnings ratio (P/E) n/a 19.1
Forecast P/E 12.5 10.1
Price-to-book ratio (P/B) 0.8 0.8
Price-to-sales ratio (P/S) 0.9 2.1

It's almost too close to call, here, with both banks trading at around 0.8 times their book value and on similar forward P/E ratios. However, Lloyds posted a statutory loss of 1.3 billion pounds for 2012, whereas Citigroup managed to deliver a $7.9bn profit, and has been profitable since 2010. For me, Citigroup's proven profitability and its lower forward P/E ratio give it a slight edge over Lloyds in terms of value.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. Yet banks have become one of the worst places to look for yield, so do Lloyds and Citigroup have anything to offer income investors?

Value Lloyds Citigroup
Current dividend yield 0% 0.1%
5-year average historical yield 2.2% 5.3%
5-year dividend average growth rate n/a -71.6%
2013 forecast yield 0.4% 0.1%

Once again, Citigroup appears to be further down the road of recovery than Lloyds. Although its $0.01-per-quarter dividend is pretty nominal, it passed a recent Federal Reserve stress test with flying colors and could have requested a dividend increase while remaining within Federal guidelines.

Citigroup's CEO Michael Corbat has chosen not to pursue this route and to spend another year improving the bank's capital position, but he had the choice -- unlike Lloyds' board, which did not recommend a dividend in 2012, due to "regulatory uncertainty and the statutory loss in the year." Consensus forecasts suggest that Lloyds might declare a small dividend in 2013, but in reality, this is just a mixture of guesswork and hope, as until Lloyds becomes sustainably profitable, it is unlikely to declare a dividend.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Lloyds and Citigroup shape up in terms of growth?

Value Lloyds Citigroup
5-year earnings-per-share growth rate -280% -14%
5-year revenue growth rate 6.9% -10.9%
5-year share price return -87% -76%
3-year share price return -13.2% 19.6%

Since the five-year share price return figures include the pre-financial crisis period, I've also added in a row for three-year share price return, which I think shows more clearly the difference between the two companies. There's no clear winner between these two in terms of growth -- both have profitable core businesses and legacy problems that are causing huge losses each year, but at present, Lloyds' situation is worse.

Should you buy Lloyds or Citigroup?
In my view, Citigroup is considerably further along the road to recovery than Lloyds. Citi's CEO Michael Corbat was appointed last year after the previous incumbent, Vikram Pandit, was encouraged to resign. Corbat has initiated wide-ranging changes that have seen the bank cut costs, reduce its headcount, and clearly define the non-core assets it wants to sell. Unlike at Lloyds, profits from Citi's core business are big enough to outweigh its losses, which I believe should help Citigroup deliver strong returns to shareholders as its financial situation continues to strengthen.

My buy -- for both income and growth -- would be Citigroup, but banks' finances are notoriously complex, and if you would prefer a profitable business whose affairs are easier to understand, then you may want to take a look at the home-grown business I mention below, which has outperformed both Lloyds and Citigroup by a big margin in recent years.

2013's top growth stock?
Discovering shares that can outperform the wider market over long periods isn't easy, but here at the Motley Fool, we've found one stock that outperformed the wider market by 32% in 2012 and has continued to move ahead of the FTSE 100 in 2013.

All the details are available in a new free report, "The Motley Fool's Top Growth Stock For 2013," but I can tell you that the company in question operates a number of businesses that are household names -- and unlike some of its peers, it has managed to adapt to new technology and make big profits from it. The Fool's analysts have identified several major catalysts that could drive further earnings growth this year, and they believe the company is worth far more than its current valuation.

If you would like to know more, I would strongly recommend you click here to download this report immediately -- it's completely free, but it will only be available for a limited time.

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