Barclays wary of regulatory 'bumps' for RBS, hikes Lloyds PPI forecasts

Barclays analysts have increased their estimates for Lloyds Banking Group' PPI mis-selling provisions but said Royal Bank of Scotland was "still a few years away" from being an attractive investment.

Lloyds's forecast fourth-quarter provisions for PPI were upped to £2bn from £0.8bn, which results in full year statutory earnings per share falling to just 0.5p.

Barclays said this raised questions about the potential for capital distribution given that the half-year dividend was already just 0.75p.

"Although an additional significant PPI charge could hamper near-term prospects for capital distribution, we see this as more of a timing issue than anything else," Barclays said in a note.

The analysts said they believed the majority of the valuation upside for Lloyds would be from a potential re-rating to a level more reflective of its sustainable mid-teens return on tangible equity (RoTE).

Barclays said it saw a longer wait for RBS, though the medium-term investment case remained attractive as it move towards a low teens RoTE and offers prospects for "significant capital return".

However, the announcement of a £3.6bn hit reconfirmed the view that it was "too soon to invest in RBS" as analysts view the additional £1.5bn provision against US residential mortgage-backed securities (RMBS) as "incremental" to the total £6bn charge it had previously anticipated.

Furthermore, RBS has not yet made a provision for settlement with the Department of Justice, which "seems some way off and its size remains very uncertain".

Barclays retained its 'overweight' on Lloyds with a 95p price target and 'equalweight' rating on RBS with a target price cut to 290p.