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A SWOT Analysis Of Lloyds Banking Group PLC And Royal Bank of Scotland Group plc

Lloyds Banking Group

Shares in Lloyds Banking (LSE: LLOY)(NYSE: LYG.US) have had a good run this year. However, they have recently struggled to advance significantly above the level that the UK government recently began selling at.

Strengths

Lloyds recently reported that at the end of September it had a core tier 1 ratio (a key measure of a bank’s safety) of 9.9%. This was up from 8.1% at the end of 2012. Lloyds’ continued profitability is protecting shareholders from future losses and increasing the chance that it may soon begin paying dividends again.

Weaknesses

Unfortunately, Lloyds has little international diversity. This makes the bank particularly exposed to the domestic economy. The financial crisis highlighted the dangers of this strategy as UK-focused banks either went bust or nearly bust.

Opportunities

The demise of former competitors Northern Rock and Bradford & Bingley will make it much easier for Lloyds to win UK business than before. This will help Lloyds’ profitability.

Threats

Lloyds continues to rack up new PPI compensation costs. The recently quarterly announcement confirmed another charge of £750m. There is also the possibility of further fines and costs if Lloyds is found to have participated in exchange rate fixing.

Royal Bank of Scotland

I think that there is room for significant share price rises at RBS (LSE: RBS) (NYSE: RBS.US).

Strengths

RBS still have some significant international assets. The bank has mortgage assets of around £20bn in its US arm Citizens and has a similar amount of exposure in Ireland. Although RBS has committed to beginning a sale of Citizens next year, it is expected to retain a stake into 2016.

Weaknesses

RBS still retains considerable non-core assets of around £37bn. If these dubious assets get revalued downwards, the impact on profitability could be significant.

Opportunities

RBS continues to demonstrate the value of its business via disposals. This should make the bank a more profitable operation.

Threats

Majority shareholder in RBS, the UK government, has done much to undermine the company’s share price. For as long as the government is on the shareholder register, the risk of further expensive interference remains.

Given the relative share valuations (Lloyds trades at 1.5 times book value, whereas RBS trades around 0.8 times) I will be sticking with my RBS investment.

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> David owns shares in Royal Bank of Scotland but none of the other companies mentioned.