Equities research analysts at Jefferies initiated a buy rating with a price target of 390p) for shares of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) in a note to investors on Friday.  The analysts also recommended a hold rating with a price target of 65p for the stock of Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY).

Royal Bank of Scotland and Lloyds

According to analysts Joseph Dickerson and Omar Fall, they believe that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) and Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) need commercial freedom to become a normal investment proposition and maximize its use to the real economy.

Dickerson and Fall will start the disposal of its bank shares at Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) because it has a greater prospective lending capacity to the real economy, which could help render a more efficient transmission mechanism of monetary policy.

Analysts Skeptical of Bank Separation

The analysts believe that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has the ability to redeploy £94 billion from its liquidity portfolio into a more profitable lending activity. They estimated that the bank has £3.7 billion of easily tapped contingent capital.

Dickerson and Fall emphasized, “The notion of breaking the banks is misplaced in our view, for the wind down of RBS’s non-core business is nearly complete, and such exposure is estimated to end 2013 at half the level of similar assets at Lloyds.”

The analysts added that splitting the banks would not promote competition instead it will cause more hindrance.

They believe that the retail business of Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) in United Kingdom could benefit from a return to lending growth in the consumer segment. The analysts suggested that it could drive an estimated cumulative NII of £1.8 billion, higher than Street estimates for 2013 to 2015.

Shares May Be Exposed to Political Risk

Dickerson and Fall explained that their valuation for shares of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) at 390p is based on regression of 10-year GILT yield and sub CDS. They based their valuation on the stock of Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) at 65p on MCPM-derived Ke of 9.7 percent and 2015 RoTE of 11 percent.

According to them, shares of the banks are exposed to extensive political risks because of the fact that the government owns an 81 percent stake in Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) and 39 percent stake of Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY).