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Deutsche Bank and Citi warn of margin pressures facing UK challenger banks

Deutsche kicked off research coverage of Virgin Money and CYBG with a ‘hold’ and ‘sell’ recommendation respectively, while Citi analysts moved Metro to ‘neutral’ but only to bring it in line with its stance on the sector as a whole
metro bank
When Metro Bank opened for business in spring 2010, it became Britain’s first new high street bank in over 150 years

City number crunchers don’t seem too upbeat on the prospects of challenger banks in the UK.

Deutsche Bank took a bearish view on the sector and the companies in it as it initiated coverage of both Virgin Money Holdings (UK) PLC (LON:VM.) and CYBG PLC (LON:CYBG).

READ: Credit Suisse reckons Virgin Money could now be an “attractive” takeover target

It opened with a ‘hold’ rating and 305p target price on Virgin despite acknowledging that the stock trades at a discount to other UK domestic bank and that growth in recent years has been “strong”.

“We think VM faces margin and NII pressure in 2018 due to mortgage and deposit competition which is not fully factored into consensus,” said analyst Mairead Smith.

As for CYBG, it is advising clients to sell the stock which it reckons is “expensive and facing margin pressure”.

Smith also bemoans the single-digit return on tangible equity (RoTE), which compares unfavourably to the double-digit RoTE seen as Virgin and other banks.

“Despite much progress and good execution on cost cutting, CYBG is a single-digit RoTE business, and we expect it to remain so through our forecast period,” said Smith in Wednesday’s note.

On top of that she expects margins to be lower than CYBG has guided for due to the firm’s “asset pricing structure and limited ability to offset on liabilities”, noting that CYBG’s deposit costs are already low and sector pricing is now rising.

“We do not think this is reflected in CYBG's relatively expensive valuation hence, we initiate with a ‘sell’ rating.”

READ: Metro Bank third quarter profits surge as it continues expansion

Even an upgrade of Metro Bank PLC (LON:MTRO) from Citi couldn’t really be construed as a positive move.

Analysts there moved Metro up to ‘neutral’ to bring it in line with its stance on the sector, although they did also warn on margin pressures.

“While we expect strong growth to continue in 2018 supported by market share gains, we also expect the environment to get progressively tougher, driven by structural changes and competitive forces in the UK lending markets, impacting net interest margins,” said analyst Nicholas Herman.

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