Virgin Money plc (LON:VM. and CYBG PLC (LON:CYBG) have been widely rumoured to be eyeing up a takeover of troubled lender Co-operative Bank plc (LON:CPBB).
The Co-op Bank on Friday said it had received “a number non-binding proposals from "strategic and financial parties" but declined to name the interested bidders.
RBC Capital said it believes a potential deal would be dilutive for Virgin Money's net interest margin but more accretive to CYBG’s earnings.
READ: Co-op Bank receives non-binding proposals to buy the troubled lender
CLICK HERE: For a daily round-up of all the Proactive news
“While the acquisition could provide Virgin Money immediate scale in the current account market, we show the deal would dilute net interest margin,” RBC said.
“We prefer the technologically efficient organic strategy currently in place- adding in a restructuring branch based story would be negative in our view.”
CYBG takeover makes more financial sense...
While the broker sees "greater strategic rationale" for Virgin Money to buy Co-Op, it thinks a deal with CYBG makes more financial sense.
RBC argued that CYBG, which owns the Clydesdale and Yorkshire banking brands, is more similar to Co-op Bank's business.
“The acquisition would increase the revenue efficiency of the combined branch network and CYBG's track record on cost cutting could drive higher returns,” RBC added.
The lender put itself up for sale in February due to continued struggles after having to be rescued from the brink of collapse by a group of US hedge funds in 2013 following the discovery of a £1.5bn hole in its finances.
In last Friday’s announcement, the company said it had selected several parties to enter the next phase of talks.
Capital raise still on the table...
If the disposal plan fails, Co-op will need to raise up to £750mln of additional core capital.
This option still remains on the table as the bank is continuing to hold talks with existing and other potential new investors on options to build capital. There is no certainty that an offer will be made for the bank, it said.
RBC expects Virgin Money and CYBG would need to raise equity to fund the deal even if equity bids are zero.
"To fund the deal would require a c.50% increase in sharecount for Virgin Money and c.30% for CYBG."