Our two bailed-out banks are recovering faster than I would have imagined a few short years ago, but one of them is clearly lagging — and it’s Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US).
If I were to buy one, it would be Lloyds Banking Group. Here are three reasons why it wouldn’t be RBS:
1. Too high, too soon
That’s where the share price has gone.
We still haven’t seen any return to profit from RBS — in fact, the shredded bank reported a cringeworthy pre-tax loss of £8.2bn last year. Sure, there’s a profit of nearly £4.4bn forecast for 2014, but we haven’t seen it yet. With the shares at 324p, we’re looking at a forward P/E of nearly 14, which would be about right for a company that was already profitable and generating cash.
Looking at Lloyds, we’ve already seen a small profit in 2013, with £5.9bn forecast for this year — yet Lloyds shares are on a P/E of only 10.
2. No dividends
We’re also expecting to see a return of dividends at Lloyds, with the bank set to ask the Prudential Regulation Authority (PRA) for permission to make a second-half payment — and its capital ratios look strong enough for that to be granted. The pundits are expecting a 2% yield overall, rising to 4.4% next year.
But we’re nowhere near that with RBS yet. There’s no cash expected this year, and only a stingy 0.5% yield suggested for 2015.
3. Capital ratios lagging
RBS is making progress against the PRA’s new capital requirements, but again it’s slower than the rest. At the end of its first quarter this year, the bank reported a Common Equity Tier 1 (CET1) ratio of 9.4%. That was up from 8.6% at 2013’s year-end and its target of 11% by the end of 2015 is looking good.
But compare with Lloyds again, and we see the Black Horse riding a CET1 ratio of 10.7% at the end of its first quarter — Lloyds has already almost reached RBS’s 2015 year-end target!
Of these two banks, one is worth buying and the other is not, and it seems clear to me which is which.