With Lloyds Banking Group trading at a 12-month high, Investec has downgraded its rating for the stock from 'hold' to 'sell' and recommends investors to 'seek refuge' in sector peers Barclays and Standard Chartered, both of which are rated 'buys'.

Shares in Lloyds are up a whopping 96% from the lows seen in November 2011 and, at 0.75 times tangible net asset value (tNAV), trades at a "healthy premium to both Barclays ('buy') and Royal Bank of Scotland ('hold') despite another loss in 2012e", said analyst Ian Gordon.

Gordon admits that Lloyds has made progress, with the 'loans:deposit' ratio down from an "alarming" 154% to just 126% in 18 months.

However, he said that "unfinished business should constrain enthusiasm over the scale and pace of return on equity (RoE) recovery. Even by 2014e, we can only forecast a RoE of 6% versus the company's abandoned 12.5-14.5% target".

According to Investec, sellside consensus expectations for the second half appear to contain an assumption of £400m fair value gains against Lloyds's guidance of £140m. Gordon said: "On this occasion, we see no rationale for such a clear rejection of company guidance!"

To conclude the research report, Gordon said: "The extended NIM [net interest margin] decline may be over, but 'core' NII [net interest income] is still falling, Other Income is weak, impairments are elevated with considerable tail risks, asset prices are easing, and the outlook for return on equity remains anaemic. No dividend in 2012e."

BC

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