Why Hold Royal Bank of Scotland Group plc When You Can Buy Lloyds Banking Group PLC?

About the only thing I got right about my brief foray into holding shares in Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) was selling at the right time.

I bought the wrong bank and for the wrong reason soon after the financial crisis, before finally seeing the light in 2013 and selling at around 350p a share.

I made a decent profit but was rather ashamed about it, because this was evidently a lucky trade rather than a wise investment.

Bring Me Sunshine

Two years later and shares in the stricken bank are trading at just 345p, and I’m wondering who is still clinging onto this stock.

Why would you hold a bank that still has a daunting mountain to climb, when FTSE 100 fellow traveller Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is nearing the sunlit uplands?

While the taxpayer now holds just 18.99% of Lloyds, and should own nothing at all by the end of the year, RBS is still more than 80% State-owned.

Chancellor George Osborne is said to be planning a Thatcher-style privatisation, possibly in September, in a bid to recoup some of the government’s £45.2bn outlay. But the first tranche of RBS will be sold at way below the 502p per share the taxpayer paid. In contrast, at today’s 88.5p, Lloyds is comfortably above the government’s break-even price of 73.6p.

Osborne will no doubt be hoping that the excitement generated by a massive privatisation will drive up the price for the next round of sell-offs, and he may well be right. Despite widespread expectations that selling off Lloyds might dilute the share price, it is up 43% over the past two years.

The Low Road

Many investors could be tempted to buy RBS now, before the excitement builds. But first, they must understand how far the bank has to travel.

Although it reported a first-quarter underlying profit of £1.6bn, this translated to a £446m loss due to ongoing restructuring costs, and litigation and conduct penalties. Total Q1 income fell 14% year-on-year to £4.3bn.

Chief executive Ross McEwan has a long way to go to achieve his aim of almost halving the bank’s risk weighted assets to £183bn.

It won’t help that RBS is said to be in line for a £6.5bn penalty for mis-selling sub-prime mortgages and mortgage securities in the US. Nobody want to mess with Yanks, just ask Sepp Blatter. Worse, this could make the unlikely prospect of a 2015 final dividend even less likely.

Home Run

By comparison, if Lloyds is 100% in private hands by the end of this year, that would give sentiment another lift.

And with State shackles removed, it may also be yielding 4.7% by the end of 2016, yet it still trades at less than 11 times earnings.

RBS still has a long journey ahead of it, but Lloyds is almost home.

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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.