Analysts at JP Morgan Cazenove have equalised their ratings for CYBG PLC (LON:CYBG) and Virgin Money Holdings PLC (LON:VM.) by upgrading and downgrading them to ‘neutral’ respectively as they saw little upcoming sector turbulence from the agreed merger.
The US investment bank said CYBG's £1.7bn takeover of Virgin, agreed on June 18, was likely to create a stronger UK bank but was unlikely to “materially shift the competitive backdrop” due to the lack of excess funding, a reliance on the Bank of England’s Term Funding Scheme (which provides funds to banks to encourage interest rate cuts for household and business loans), and a focus on taking SME (small to medium enterprise) deposit share.
READ: Virgin Money agrees £1.7bn takeover by CYBG
The analysts also said that the merger would be “highly accretive” for CYBG and upgraded it to ‘neutral’ from ‘underweight’ and upped its target price to 310p from 270p: “Given Virgin Money’s low PE ratio relative to CYBG before the merger announcement and the high-cost synergies (£120m vs JPMe £90m), we see the combined group trading at 9.6x 2020E PE and 8.2x 2022E PE, when the synergies should be fully delivered (vs CYBG at 12.7x 2020E PE pre-deal).”
However, they added that from a valuation perspective, the post-merger multiples were still at a premium to other banks such as Lloyds Banking Group PLC (LON:LLOY) and Royal Bank of Scotland Group PLC (LON:RBS), who offered higher dividend yields and buybacks.
For Virgin Money, the bank moved its rating to ‘neutral’ from ‘overweight’, and issued a target price of 400p, as it only saw a 4% upside on the company’s shares at the recommended offer.
JP Morgan also said that consolidation of smaller banks was likely to continue as deposit growth slowed and customer preferences shifted towards digital banking which would drive higher investment requirements for technology.
In mid-morning trading Thursday, CYBG shares were up 2.4% at 314p while Virgin Money shares were up 1.5% at 362.1p.