Sign up United Kingdom
Proactive Investors - Run By Investors For Investors

CYBG boosts capital position ahead of Virgin Money takeover but ShoreCap thinks Lloyds offers better value

Shore Capital maintained a 'hold' rating on CYBG, saying it continues to see better value elsewhere in the domestic banking sector with Lloyds offering more upside
Virgin Money
CYBG announced a deal to buy Virgin Money for £1.7bn in June

CYBG PLC (LON:CYBG), which is in the process of buying Virgin Money Holdings PLC (LON:VM), has received regulatory approval to use its own risk models to determine the amount of capital it must hold.

The challenger bank, owner of Clydesdale Bank and Yorkshire Bank, said the internal rating-based (IRB) accreditation granted by the Prudential Regulation Authority for its mortgage and small businesses would reduce the risk-weighted assets (RWA) held in the two portfolios.

On an IRB basis, the group’s RWA as of June 30 would have been £4.5bn lower in the mortgage portfolio and £800mln lower in the small business portfolio, boosting its common equity tier 1 capital ratio by 390 basis points to 15.3%.

“Assuming a minimum benchmark core tier 1 ratio of 12% would imply that the group has 330bps or c.£0.5bn of surplus capital (equivalent to around 20% of its current market cap),” Shore Capital said.

READ: Virgin Money and CYBG merger receives approval from UK's FCA and PRA

The impact of IRB will be reflected in the company’s results for the first quarter ended December 31.

Risks models determine how much capital is needed to withstand any future financial shocks.

Banks are required to use the same risk models unless approved by regulators to use their own measures.

Last week the Financial Conduct Authority and the PRU gave the green light for CYBG’s £1.7bn merger with Virgin Money. The deal was announced in June.

Lloyds offers more value than CYBG, says ShoreCap

Shore Capital said: “Both CYBG’s and Virgin Money’s shares have weakened recently such that they now offer upside of c.20-21% to our fair value estimates of 345p and 420p respectively and so, despite our current 'hold' stance on both stocks, we would not be averse to investors dipping a toe in the water at current levels.

“That said, we continue to see even better upside elsewhere in the domestic mainstream banking space, noting that Lloyds Banking Group (LON:LLOY) (Buy at 59p) currently offers 35% upside to our fair value of 80p.” 

View full CYBG profile View Profile

CYBG PLC Timeline

Related Articles

April 24 2018
Redfund is positioning itself to become a top-tier cannabis incubator and accelerator

No investment advice

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person. You further understand that none of the information providers or their affiliates will advise you personally concerning the nature, potential, advisability, value or suitability of any particular security, portfolio of securities, transaction, investment strategy, or other matter.

You understand that the Site may contain opinions from time to time with regard to securities mentioned in other products, including company related products, and that those opinions may be different from those obtained by using another product related to the Company. You understand and agree that contributors may write about securities in which they or their firms have a position, and that they may trade such securities for their own account. In cases where the position is held at the time of publication and such position is known to the Company, appropriate disclosure is made. However, you understand and agree that at the time of any transaction that you make, one or more contributors may have a position in the securities written about. You understand that price and other data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that neither such data nor such calculations are guaranteed by these sources, the Company, the information providers or any other person or entity, and may not be complete or accurate.

From time to time, reference may be made in our marketing materials to prior articles and opinions we have published. These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current. As markets change continuously, previously published information and data may not be current and should not be relied upon.

© Proactive Investors 2018

Proactive Investors Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use