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Jefferies switches views on two challenger banks, upgrading CYGB to ‘buy’, downgrading Virgin Money to 'hold'

In a note to clients, the US broker said it sees the 8% pullback in CYBG shares in the year-to-date as a buying opportunity, leaving its price target unchanged at 366p
Virgin Money branch
However, for Virgin Money, Jefferies downgraded its rating to ‘hold’ from ‘buy’ with an unchanged 305p price target.

Jefferies International has switched its views on two UK challenger banks, upgrading its rating for CYGB PLC (LON:CYBG) to ‘buy’ from ‘hold’, while making the opposite move for Virgin Money PLC (LON:VM.).

In a note to clients, the US broker said it sees the 8% pullback in CYBG shares in the year-to-date as a buying opportunity, leaving its price target unchanged at 366p.

READ: RBC Capital switches ratings for two UK challenger banks, downgrading Virgin Money, upgrading CYBG

In mid-morning trading, CYBG shares were changing hands at 319.8p each, up 1.4% on Friday’s close.

Jefferies’ analysts forecast an 11% RoTE (return on tangible equity) from CYBG in 2020, up from 7% in 2017, with the return potential boosted by the upcoming catalysts of an internal rating-based credit risk approach, as well as SME (small and medium enterprises) business growth from Royal Bank of Scotland Group PLC’s (LON:RBS) remedies package needed by the FTSE 100-listed lender after abandoning Williams & Glynn disposal plans.

They said: “We see CYBG as a big winner from the RBS remedies package, with SME customers likely to be on-boarded as soon as June. A previously aborted bid for Williams & Glyn was made in the knowledge that there was a 90% product capability match between the banks, with CYBG already making a push into its traditional heartlands of the Midlands/NW.”

The analysts added: “We expect CYBG's double-digit RoTE ambition to be hit a year later than targeted in FY20.“

Virgin Money "value trap"

However, for Virgin Money, the Jefferies analysts downgraded their rating to ‘hold’ from ‘buy’ with an unchanged 305p price target after cutting their 2019-2021 pre-tax profit estimates by 13%.

They concluded that Virgin Money’s shares “will remain a value trap until the market sees proof of concept of the digital strategy, which is likely more than a year away.”

In mid-morning trading, Virgin money shares were down 2.8% at 267p.

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