Is Royal Bank of Scotland Group plc a better investment now than Lloyds Banking Group plc?

It’s only a few years since I was first eyeing Lloyds Banking Group (LSE: LLOY) as a very attractive recovery investment with great long-term dividend potential. 

Today, I see Royal Bank of Scotland Group (LSE: RBS) in a very similar position, and I can’t help wondering if the time has finally come to buy into the once-shredded bank. 

In 2014, Lloyds had posted what was to become a sustainable return to profit, and it’s been improving nicely since — there had been a modest profit in the turnaround year of 2013, but it was too little to support confidence yet. There was also a dividend on the cards, albeit very much a token one which turned out to yield just 1%. But it was a start, and since then Lloyds has gone on to provide a 4.1% yield last year with forecasts suggesting more than 6% by 2018.

RBS coming back

RBS looks set to make 2017 the year it gets back to solid profits, with a decent £1.2bn in pre-tax pencilled-in, followed by £3.5bn in 2018. The predicted dividend this year would yield only 0.2%, but it’s set to reach a well-covered 3.6% next year.

And there’s more good news, after a group of RBS investors have apparently agreed to settle claims arising over the bank’s 2008 rights issue. The £12bn raised was an attempt to prop up RBS’s crumbling balance sheet, and investors have since claimed it was based on misleading information. The 82p-per-share deal will cost RBS around £200m, but it could have been far worse.

On top of that, we’ve started to see a change in sentiment towards the shares, with the price having gained 70% since a low point last July to 256p, which suggests to me that the institutional investors are starting to see their uncertainty clearing.

Lloyds still better?

Having said all that, it might not be surprising that I still plump for Lloyds as the better investment even now. One difference between Lloyds then and RBS now is that Lloyds shares were on a P/E in the nine to 10 range, which was commensurate with the risk at the time. And even today, with profits healthy and the dividend flying, we’re still looking at forward multiples of only around 10 based on forecasts for this year and next and a share price of 69p.

Potential RBS investors are facing a forward P/E of 12 this year at a point when I see it as still the riskier candidate — and there’s going to be a lot less in dividends as compensation for it.

There’s also that rather annoying stock overhang that will be with us for some time yet, with the government still holding a massive 73% stake. Chancellor Philip Hammond has admitted it will probably be sold off for a multibillion-pound loss, but the process is almost certain to hold the price back as the shares are dumped.

Time for banks

Our Brexit outcome is looking even muddier now after last week’s general election, possibly dropping more rocks in the path of our banking sector recovery, but I see the banks as largely back to health now and looking like good investment material.

And I do see RBS as a reasonable long-term punt right now. It’s just that I still see Lloyds as the better bet at a more attractive price.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.