Both Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS) have turned themselves round dramatically since the crunch, but in share price terms RBS has had a much better year so far in 2014 — it’s up 16% to 391p, compared to just 1.5% for Lloyds to 80p.
But I reckon we should see the opposite in 2015, with Lloyds looking the better prospect.
Quicker recovery
Looking at fundamentals, Lloyds’ superior pace of recovery has put it in a stronger position than RBS after it recorded a pre-tax profit for the year to December 2013 (albeit a small one), while RBS was bringing home a rather stunning £8bn loss.
Both look set for profits this year and next, with forecasts suggesting positive earnings per share (EPS) for RBS for the first time since the crisis — there’s 37p indicated for the current year, but the City currently thinks that’s going to drop back a little to 31p in 2015. We’re looking at P/E multiples of 10.6 and 12.4 for the two years, with maybe perhaps a hint of a suggestion of a very small dividend in the second half of 2015.
Lloyds, on the other hand, is predicted to achieve EPS of 7.9p this year followed by 8.1p next, which would give it P/E values of 10.3 dropping to 9.8 — and that’s the direction a forecast P/E should be going.
Dividend doubts
But then we come to the vexed question of the dividend. There’s a payment forecast for this year which would yield 1.3%, and which Lloyds has been working towards for some time. But Lloyds came bottom out of the UK’s banks in the recent round of European banking stress tests — it passed, but only just.
That must raise serious doubts about whether the FCA is going to approve Lloyds’ plan to hand out cash this year after all, and it had a mildly depressing effect on the share price — but we have actually seen a 4% recovery in the past month. As of Lloyds’ third-quarter update at the end of October, all the bank was able to tell us was that “As the business is performing strongly and the balance sheet has continued to strengthen, we are in ongoing discussions with the PRA regarding the resumption of dividend payments” — but it sounded pretty bullish apart from that.
At Q3 time for RBS we heard of a third successive quarterly profit, and the shredded bank is clearly getting back to long-term health too.
Lloyds for 2015
But overall, with Lloyds penciled in for a 3.6% dividend yield in 2015 and held back in the short term by its weaker stress test performance, I expect its shares to outperform RBS in 2015.