Citi says shun this best-performing bank stock

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Analysts at Citi on Friday released a note to warn of their "neutral" rating on top-performing banking stock, offering alternative investing advice and telling investors to stay away from the "love-in".

That stock is Lloyds - 39 percent owned by the U.K. taxpayer's after a £21 billion ($32 billion) bailout in 2008. Shares have risen 48 percent in the last three months, 134 percent in the past year.

According to data from Citi, its sharp rise is almost double the second-best performing bank, Morgan Stanley, and well ahead of the MSCI World Banks Index (which is up only up 3 percent). It is third only behind two Japanese banks, Nomura and and Daiwa Sec. That means Lloyds is now the second-biggest bank stock in Europe by market capitalization, it said. So why so pessimistic?

(Read More: Lloyds Stake Earmarked for Retail Investors)

"We believe the valuation looks full and see more attractive opportunities elsewhere within the sector," the bank's global analysts said in a research note.

There are several key reasons behind this bearish feeling, Citi said. The stock has received a bounce with constant headlines in the last few months that the U.K. government was planning on offloading its stake in it. Shares are now trading at 70.03 pence, well over the 61 pence required to make sure the U.K. taxpayer breaks even after 2008's bailout. A plan has been earmarked to sell a 5-10 percent stake to retail investors, according to media reports, and this could begin as early as September.

But there's more. A U.K. economy that is finally showing signs of "green shoots", a new Bank of England governor who sounds dovish so far, supportive government schemes, a resolution to regulators' capital concerns and a turning point in the bank's ability to make money are other principle reasons why investors have piled into Lloyd's stock, according to Citi.

(Read More: HSBC 'Sneaky' Results Make Lloyds, RBS Worth Buying: Analysts)

But these reasons are misguided, Citi said. Government schemes will benefit borrowers not lenders. A U.K. recovery is already priced in. New mortgages are showing narrower margins and overhang risks are likely to remain well into 2014, even if the government does begin an initial placing this summer, it said.

The stock is currently trading on a 1.3 price-to-book ratio, with an estimated return on equity at 10.7 percent for 2014 and it has an estimated price-to-earnings ratio of 11.0 times for next year, Citi said.

(Read More: Lloyds Chairman Stands Down as Government Sale Looms)

"Barclays remains our top-pick, where we believe leverage ratio concerns are overdone and [second quarter] results should be supportive," Citi said,

"Overall we prefer the U.K. International Banks. At HSBC and Standard Chartered (both "buy" ratings) margin pressure is starting to ease; USD strengthening versus GBP is a translational positive; greater focus is being placed on costs and asset quality risks remains benign."

By's Matt Clinch. Follow him on Twitter @mattclinch81.