A major risk facing the proposed merger of Virgin Money Holdings (LON:VM.) and CYBG is the combination of the two banks’ IT systems, analysts have warned.
Virgin Money has agreed to be taken over by CYBG, the owner of Clydesdale Bank and Yorkshire Bank, for £1.7bn.
READ: Virgin Money agrees £1.7bn takeover by CYBG
While many analysts think the deal will deliver cost efficiencies, the fear is that the enlarged group could face a similar online banking meltdown to that of TSB if not careful in integrating the IT platforms.
TSB, which was sold to Spanish bank Sabadell in 2015 by Lloyds Banking Group PLC (LON:LLOY), experienced an IT crash last month following a migration of its computer systems to a new platform developed by its parent.
READ: TSB to be probed by FCA over handling of the bank’s ongoing IT problems
Virgin Money and CYBC needs to avoid same fate as TSB, says analysts
Analysts believe Virgin Money and CYBG could learn from TSB’s mistake.
“There is some strategic logic in putting them together but widely different cultures and the combination of two IT platforms are two major risks which could cause a hiccup or two down the line,” said AJ Bell investment director Russ Mould.
Artjom Hatsaturjants, research Analyst at Accendo Markets, echoed Mould’s remarks by saying: “Much work remains ahead, especially to integrate the two banks’ IT systems, with the lesson of TSB/Sabadell IT meltdown not lost on anyone.”
Deal ‘good’ for shareholders, according to UBS
UBS said it thinks the proposed deal is “good” for shareholders if they “believe in the synergy potential and benefit from growth opportunities” available, including Royal Bank of Scotland Group PLC’s (LON:RBS) fund for challenger banks to support lending to small and medium enterprises (SMEs).
The investment bank left its rating on Virgin Money at ‘neutral’ and target price at 290p.
“With the combined entity serving c.6m retail and SMEs customers, we expect the Virgin Money acquisition will add to scale (both revenues and costs), provide a better service proposition for SMEs and lower funding costs,” UBS said.
“However, we have concerns around: i) this not fixing the problem of low deposit base as new entity will have pro-forma 117% loan to deposit ratio with the Term Funding Scheme accounting for c.12% of the loans; ii) IT system migration risks as seen at TSB.”
The Bank of England ended its £127bn Term Funding Scheme, which delivered a stream of almost interest-free loans to banks, in February.
Virgin Money and CYBG seen unlikely to dent market share of big four
The combination of Virgin Money and CYBG will create the UK’s sixth largest bank with six million customers.
“On their own both banks are likely to struggle for market share while together they are a decent fit, and will probably be more durable in terms of competing on the same playing field,” said Michael Hewson, chief market analyst at CMC Markets.
“There isn't much overlap in terms of business strengths with Virgin already having a strong digital presence as well as having a decent presence in mortgages and credit cards, having bought Northern Rock, while Clydesdale Yorkshire is strong in terms of current accounts and personal banking, though there will be some job losses.
“While it will certainly help competition in the UK banking market which has suffered to some extent from a lack of competition, it’s unlikely they will make much of a dent in terms of eroding the market share of the big four.”
The big four lenders include Lloyds, RBS, Barclays PLC (LON:BARC) and HSBC Holdings PLC (LON:HSBA).