Are City analysts being too cautious on the banks?

Caution still remains among banking analysts. Lloyds was downgraded again this week, while another analyst has reiterated his cautious view of both Royal Bank of Scotland and Lloyds. Others have never had the pair off their sell lists.

Given that RBS shares are up 200% and Lloyds' shares have soared 250%, it is easy to believe that those analysts who keep knocking the pair have got it wrong, misunderstood the mood and should be dismissed unless you want to miss out on even more potential profit.

But is past performance really enough to dismiss what they're saying now too? Or could they finally be right?

After all, even the most bearish of these analysts believes that recovery will come – eventually. And recent news suggests that house market activity is on the rise, as is demand for unsecured lending. Meanwhile, the banks – contrary to many observers’ expectations – are making good margins in the current low interest rate environment.

And some of the caution is no more than a recommendation that shares are going to go down before they go up.

Take Mark Phin at Keefe, Bruyette & Woods. He remains cautious on Lloyds, because uncertainty remains about whether or not the group will take out insurance with the government against more of its loans going bad.

With speculation mounting, the bank will either can the plans altogether or will mix it up and ask shareholders for more cash to keep a keep the government's stake below 50% – you can see why he thinks it’s best to steer clear at the moment.

For what it’s worth, Phin thinks a massive rights issue is unlikely – although he thinks the hybrid outcome cannot be ruled out.

Of course, he doesn't actually know any more than any of us, since Lloyds has probably not yet made up its mind.

And if you're looking for reasons to be ignoring his pessimism, you might point to the fact he has had to lift his price target by 64% to take into account the gains already made so far this year.