Here Is Why Lloyds Is a Better Financial Services Stock Than RBS

In a match-up between British financial services giants Lloyds Banking  (LYG) and Royal Bank of Scotland  (RBS) , the former is the clear winner as a growth investment.

Lloyds Banking offers a strong financial scorecard, a hefty dividend and resolved legacy challenges. RBS, on the other hand, is caught in a rut, and there doesn't appear to be an easy way for this iconic lender to make a comeback.

The two banks are often compared with one another, as both institutions were saved by taxpayer money during the 2008 credit crisis.

However, Lloyds Banking has since moved past the rescue and is poised for market-beating growth.

Although RBS registered its eighth straight annual loss in February, Lloyds reported 1.6 billion pounds in profit before tax.

In the clearest indication that Lloyds Banking can survive on its own, the government is slashing its stake in the bank to less than 10% from 43%. However, the U.K. government still owns 73% of RBS.

In addition, Lloyds Banking comforted shareholders by restarting dividend payments last year after a six-year drought.

The company has said that it is on course to pay a greater dividend this year.

Some think that Lloyds Banking could achieve a dividend yield of 4.8% this year. 

The story is different for RBS, however, with the first post-financial crisis dividend payout still some time away.

Meanwhile, Lloyds Banking is shielding its net interest margin, ahead of pursuing growth in a weak business environment marked with caution over the Brexit.

Of course, Lloyds Banking has taken another hit to cover payment protection insurance claims, but it isn't the only bank suffering on that count.

RBS is, however, nowhere close to a recovery. Its biggest challenge is its inability to manage legacy issues and achieve progress on pre-set timelines.

The company scrapped plans to carve out the Williams & Glyn division that it absorbed it in the mid-1980s. It is increasingly clear that RBS will miss the deadline and the budget for the spin-off, even following various attempt to offload the division over the past seven years.

RBS' other challenges, including a fine from the U.S. Department of Justice over the pre-crisis sale of mortgage-backed securities, are hard to overcome.

Meanwhile, the turmoil at Deutsche Bank, in which the Justice Department is seeking up to $14 billion in fines is deepening. But RBS reportedly sold more of the securities than Deutsche Bank did, which puts it at risk of an even bigger fine.

There are clearly good reasons why shares of RBS trade at a price-book ratio of 0.42, compared with 0.73 for Lloyds Banking.

Expect this gap to widen. Lloyds Banking is definitively the better U.K. bank stock and a great growth opportunity in a volatile market.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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