An upgrade has got the City excited about this challenger bank which they say offers good risk-reward.
The tentative progress of domestic banking stocks in 2019 was maintained today after new Virgin Money owner CYBG (LSE:CYBG)surprised analysts with an upgrade to margin guidance.
CYBG shares rebounded 14% to 204p following the first quarter trading update, although the stock still has a long way to go to revisit the 345p seen as recently as last July.
Sentiment since the summer has been wrecked by Brexit uncertainty and sustained pricing pressure in the UK mortgage market, with CYBG's own pessimism about market conditions causing a sharp sell-off in shares alongside November's annual results.
However, the group eased the worst fears of investors today by revealing a net interest margin (NIM) of 1.72% for the quarter. It also reported a 1.4% rise in overall lending to £71.9 billion, including growth of 1.5% in the mortgage book.
While the NIM is lower than 2018, the Clydesdale and Yorkshire Bank owner now expects to deliver a full-year result at the upper end of November's guidance, at between 1.65% and 1.7%. The NIM figure is the difference between its earnings from lending and what it pays for deposits.
Given that mortgage market fears continue to cloud the investment case for domestic-focused banks, the update won't have harmed the mood around Lloyds Banking Group (LSE:LLOY) and The Royal Bank of Scotland (LSE:RBS) ahead of their annual results on February 20 and February 15 respectively.
The pair have seen a recovery in their share prices so far in 2019, with Lloyds up 17% to 58p since Christmas and Royal Bank of Scotland up 21% to 249p amid a general improvement in conditions in the FTSE 100 Index.
As far as CYBG is concerned, analysts at UBS believe that the earlier worries concerning margins are now priced into the stock, which it rates as 'neutral' with a price target of 210p.
They said: "With the stock losing over 50% since July, we think negative margin outlook and funding disadvantage — two key issues — are largely in the price and we see good risk-reward."
UBS has CYBG trading at a projected 6.2x price/earnings multiple in 2020, with a dividend yield of 7.5% in 2019.
There was further encouragement in today's update when CEO David Duffy reported progress on cost reductions, with a minimum of £150 million of synergies now expected from the Virgin Money merger by the end of 2021, compared with £120 million previously announced.
He is also encouraged by the performance in small business lending, with a rise in customer balances of 1.2% to £7.6 billion reinforcing Duffy's view that the group offers the strongest case for a "genuine boost to competition in the SME market".
While much will now depend on whether the UK can avoid a no-deal outcome on Brexit, Duffy says his focus remains on "delivering against the factors within our control".
PPI complaints are continuing at a rate of about 1,800 a week, although this is in line with the company's provisions. That should be a positive read-across for Lloyds results later this month, particularly as the FCA's August 29 deadline for claims is now firmly in view.
CYBG's acquisition of Virgin Money created the UK’s sixth biggest bank when it completed in October. The combined group has over six million customers, with £88 billion of assets and a mortgage book double the size of any other challenger bank.
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