UK banks could see weak loan growth in 2012 as households and corporates cut debt levels amid a tough economic environment and regulators press them to raise capital ratios, Citigroup said.

Citigroup analyst Andrew Coombs downgraded Royal Bank of Scotland Group to neutral from buy, and cut his price target on Lloyds Banking Group on likely loan book contraction at both the banks.

According to a survey by the Ernst & Young ITEM club, total bank lending in the UK is set to reduce 2.2 percent in 2012, the first shrinking since 2009.

Analyst Coombs, however, forecast strong loan growth at Standard Chartered and HSBC Holdings given their exposure to Asian economies, and sees modest loan growth at Barclays Plc in 2012.

The analyst maintained his overweight stance on UK banking industry saying the shares of banks were close to the 2009 trough levels.

UK banks <.FTNMX8350> have risen 32 percent since November, when they fell to mid-2009 levels.

He said banks' likely exit from non-core businesses will meaningfully lift returns.

Lloyds' non-core portfolio accounts for 15 percent of its total assets while RBS' makes up 10 percent, Coombs said.

Lloyds can shrink its non-core portfolio by about 45 percent over 2011 through 2013, and RBS by about 70 percent over the same period, estimated Coombs, a four-star rated analyst for the accuracy of his earnings estimates on UK banks, according to Thomson Reuters' StarMine data.

He reiterated his buy rating on Lloyds, HSBC, Standard Chartered and Barclays, and named Barclays his top pick in the sector.

(Reporting by Arnav Das Sharma in Bangalore; Editing by Tenzin Pema and Don Sebastian)