3 Numbers That Suggest TSB Banking Group PLC Is A Better Buy Than Lloyds Banking Group PLC

Could upstart TSB Banking Group PLC (LON:TSB) be a better buy than its former parent, Lloyds Banking Group PLC (LON:LLOY)?

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TSBTSB Banking Group (LSE: TSB) published a strong third-quarter update today and reported a 28.8% increase in pre-tax profits, an increased 9.7% share of new current account openings, and a slight increase in capital strength.

This impressive showing prompted me to take a closer look at TSB’s former parent, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), to see which of the two banks might be the better buy in today’s market.

What I found was that three key numbers all pointed in the same direction — towards TSB.

Should you invest £1,000 in Lloyds Banking Group right now?

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1. 3.6%

TSB reported a net interest margin — the profit a bank makes from taking deposits and making loans — of 3.6%. That’s considerably higher than Lloyds, which reported a figure of 2.4% for the first half of this year.

Interestingly, Lloyds’ 2.4% net interest margin is one of the better figures from the big banks — it appears that smaller banks like TSB are able to earn bigger profits from basic banking activities than their larger peers.

2. 0.8

TSB currently trades at just 0.8 times its book value, compared to 1.2 times for Lloyds.

Lloyds’ valuation is more typical of a well-established bank, suggesting that TSB shares have the potential to be re-rated by as much as 50%, as the market gains confidence in the bank’s operations and growth.

3. 18.8%

The Common Equity Tier 1 (CET1) ratio is one of the most important regulatory measures of a bank’s capital strength, and affects its ability to withstand a fall in the value of some of its assets.

Lloyds has a CET1 ratio of 11.1%, which is pretty decent, but TSB is way ahead, with a CET1 ratio of 18.8%!

TSB also has loans totalling just 91% of its deposits, whereas the equivalent figure at Lloyds is 109%, suggesting that Lloyds is more dependent on borrowed money than TSB.

Time to buy TSB?

TSB isn’t perfect — its cost to income ratio is a whopping 72.2%, nearly 50% higher than Lloyds’ impressive 50% figure. I also wouldn’t want TSB’s loan to deposit ratio to be much lower, as it might indicate the bank was struggling to find profitable opportunities to lend, which would hit profits.

However, TSB’s shares have fallen by around 10% since its flotation earlier this year, and now look like a decent buy to me, thanks to the bank’s strong net interest margin, discount to book value and strong balance sheet. 

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Roland Head 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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