Should You Buy Royal Bank of Scotland Group plc, Lloyds Banking Group plc, Virgin Money Holdings (UK) plc Or Shawbrook Group plc?

Royal Bank of Scotland Group plc (LON:RBS), Lloyds Banking Group plc (LON:LLOY), Virgin Money Holdings (UK) plc (LON:VM) and Shawbrook Group plc (LON:SHAW) are likely to benefit from an improving economy.

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Royal Bank of Scotland

Shares in Royal Bank of Scotland (LSE: RBS) have fallen 12% since the start of the year, as restructuring costs and misconduct provisions continue to rise. The bank has set aside £5.4 billion for past misconduct and litigation charges, but the potential costs are likely to be even higher.

Reports earlier in the month suggest that RBS could face a fine of up to $13 billion for the mis-selling of mortgage-backed securities in the US, whilst the bank had only set aside $2.5 million for the settlement. Being weighed down by the magnitude of these fines, 2015 will be a difficult year for the bank.

Even though its UK retail and commercial banking businesses are seeing profitability return to more normal levels, the huge loss made by its investment bank continues to act as a drag on the group’s earnings. Fixing the investment bank will likely take a lot longer, as losses have widened even as assets shrink.

In June, Chancellor George Osborne said he was looking at selling the government’s 80 per cent stake in RBS even at a loss to taxpayers. Given the size of the government’s stake, the immense selling pressure would likely keep the value of RBS’s shares low.

Lloyds Banking Group

Lloyds Banking Group (LSE: LLOY) is in much better shape. Underlying first quarter profits rose 21% to £2.2 billion, as loan impairments decline and net interest margins widen. With a cost to income ratio of 47.7% in the first quarter of 2015, Lloyds is by far the most cost competitive of the big four banks.

With expectations of lower PPI provisions and other litigation and conduct charges, Lloyds could soon reach its full-year return on equity target of 13.5-15% target. The bank is also likely to resume paying dividends later this year, as its rapidly improving profitability has strengthened its capital position significantly.

Virgin Money

Shares in Virgin Money (LSE: VM) have declined 12%, since the government announced plans for a new surcharge tax on banks’ profits in the ’emergency’ budget last week. This supertax is being used to pay for a reduction in the bank levy. But, since Virgin Money is relatively small and most of its liabilities are covered by the deposit protection scheme, it does not currently contribute to the bank levy. And so, it would be hit hard by the 8% tax surcharge on its profits, which takes effect from 1 January 2016.

However, the bank is continuing to grow fast, with gross mortgage lending in the first quarter rising 34% to £1.6 billion. Profitability is also steadily improving, as greater scale should mean its cost to income ratio should fall to 50% by 2017 and its net interest margin is expected to rise 10 basis points to 1.60% this year. Nevertheless, the bank surcharge will undoubtedly reduce capital for shareholder dividends and slow the bank’s growth plans.

Shawbrook Group

Shawbrook Group (LSE: SHAW) will also be affected by the bank super-tax, but its shares have outperformed peers in the small- to mid-cap banking sector over the past week. The business focussed bank is growing quickly, having seen its loan book more than double over the past year to £2.6 billion. With the gap in lending from the high street banks. Shawbrook enjoys net interest margins of 6.0%, which is more than twice that of other major UK banks.

Analysts expect underlying EPS will grow another 41% this year to 25.4 pence, which gives Shawbrook a forward P/E of 13.6.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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