Head to Head: Lloyds Banking vs. Royal Bank of Scotland

In this series, some of your favorite 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 the most points at the end of the contest.

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

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

Among the U.K.'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' by 37%.

Let's take our seats at ringside.

Round 1: Earnings

 

Lloyds

RBS

Recent share price 42 pence 285 pence
2012 forecast price-to-earnings (P/E) 25.3 13.8
2013 forecast P/E 11.7 11.7
2013 forecast EPS growth (%) 118 18
Forecast operating margin (%) 15 7

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

 

Lloyds

RBS

2012 forecast dividend yield (%) 0 0
2013 forecast dividend yield (%) 0.7 0.6
2013 forecast dividend cover 12.4 15.3

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

 

Lloyds

RBS

Price/Book (P/B) 0.6 0.2
Core tier 1 capital ratio (%) 11.3 11.1

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 favorable 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.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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