CYBG PLC (LON:CYBG) shares trade at an unjustified premium to Lloyds Banking Group PLC (LON:LLOY) and Royal Bank of Scotland Group PLC (LON:RBS), according to analysts at Barclays.
Barclays initiated its coverage on the owner of Clydesdale Bank and Yorkshire Bank with an ‘underweight’ rating and target price of 280p, saying it expects margins in 2019 to disappoint.
READ: CYBG trading meets estimates, lender to complete Virgin Money takeover by year-end
CYBG, which completed its £1.7bn acquisition of Virgin Money Holdings PLC last week, warned in its third-quarter trading update in June that it expects mortgage growth to be at the lower end of its guidance range due to an “extremely competitive” market.
Tough competition in the mortgage market has weighed on banks’ net interest margins (NIM) – a measure of profitability. CYBG expects a NIM of 220bps for the 2018 financial year.
For 2019, Barclays said it expects to see a drop in NIM.
“We initiate at ‘underweight’, with estimates c.10% below 2020 consensus on lower revenues: Our detailed work on the NIM indicates weakness; we expect a stepdown in 2019 NIM (likely guided at FY18 results),”
“Despite falling 26% from their recent peak, the shares trade at what we see as an unjustified c.30% 2020e P/E premium to Lloyds/RBS.”
On the Virgin Money acquisition, Barclays said it likes the deal due to the cheap price, cost synergies and rebranding but sees it making no difference to CYBG's competitive firepower.
Barclays expects mainstream challenger banks to struggle compared to stronger capitalised and highly liquid incumbents in a likely sluggish UK economy.