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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.” 

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