UKFI's Moreno sees big profits at Lloyds, RBS

LONDON, March 31 (Reuters) - Lloyds Banking Group (LLOY.L) and Royal Bank of Scotland (RBS.L) should make "significant" profits again when the economy recovers, said the head of the body managing the British government's stakes in troubled banks.

Glen Moreno, acting chairman of UK Financial Investments Ltd (UKFI), wrote in the Tuesday edition of the Financial Times that the banks were now in a stable capital and funding position and had new management teams.

"Both Lloyds and RBS have enormously valuable underlying banking franchises, which should return to significant profit as the economy recovers," he said.

Britain has spent billions of pounds in taxpayers' money on its shaken banking system and amassed a holding of up to 77 percent in Lloyds and a stake in RBS that could rise to 95 percent.

Moreno warned that the financial crisis was not over but added that the banks Britain had invested in were "well-insulated against the challenges ahead."

"The losses faced by our banks are considerable. Legacy issues from the credit bubble and credit problems from the downturn will lead to big writedowns on loans and other assets," he said, adding that controversial mark-to-market accounting was more convincing to investors than "mark-to-hope."

There are a number of scenarios in which the banks can return to "reasonable" profitability over the next few years, Moreno said.

He added he believed that private-sector investors would be attracted to the banks' shares, which have "a limited downside and quite considerable potential upside." (Reporting by Olesya Dmitracova; Editing by Gary Hill)