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Racing Demons: Will Lloyds Banking Group Plc Or Royal Bank of Scotland Group Plc Be The Winner?

Gambling

Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) both have demonic status in the popular imagination, and understandably so.

Both made devilishly bad decisions in the run-up to the financial crisis. Both needed multi-billion pound taxpayer bailouts, are still part state-owned, and riddled with toxic assets. 

And now both are trying to be good, despite the endless string of rate-rigging and mis-selling scandals. Importantly for investors, both are in recovery mode. But which racing demon will be the winner?

The Good

Last week, Lloyds stole the lead after posting an impressive 35% growth in underlying Q3 profit to £5.97bn. News that it would axe 9,000 jobs and shrink its branch network cheered markets, as it makes a concerted push into the low-cost digital age.

The result: a rather harsh 2.5% drop in the share price. Markets wanted more.

RBS publishing pre-tax Q3 profits of £1.27bn a few days later, which is a marked improvement on last year’s £634m quarterly loss. It is also looking to save money, with £1bn of cost reductions in 2014.

Markets like surprises, and RBS was awarded with a 6.5% rise in its share price, further helped by lenient Bank of England leverage ratio rules, announced that day.

The Bad

Both stocks still have their dark side. Lloyds set aside a further £900m for the next batch of mis-selling claims. 

RBS is earmarking £400m to cover fines for foreign exchange rigging. It may also face claims for mis-selling of PPI, as well as interest rate swaps and US mortgage-backed securities.

Neither stock pays a dividend. Lloyds is almost certain to resume its payout first, with some brokers suggesting it could offer a token payout of 1p before the end of the year. 

That’s hardly riches, though.

The Least Ugly

The RBS share price has put on a spurt lately, rising 10% in the last six months. Lloyds has lagged, falling nearly 6% over the same period. Yet I feel Lloyds now has too much of a headstart for RBS to catch up.

Absolution is still a long way off for RBS, with the overhang of that hefty taxpayer holding, and revenue and growth outlook still weak. Plus it also faces hefty restructuring costs.

With deposits rising, bad debts falling, and profits growing rapidly, Lloyds is the lesser of two evils right now. For me, that makes it the winner in the racing demon stakes.

You might think RBS looks the better banking prospect, or maybe even Barclays, where a 25% drop in the share price has triggered an excellent buying opportunity.

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Harvey Jones 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.