CYBG PLC (LON:CYBG) shares have underperformed versus Lloyds Banking Group PLC (LON:LLOY), Royal Bank of Scotland Group PLC (LON:RBS) and Barclays PLC (LON:BARC) in October but the bank is still trading at a premium to its bigger rivals, UBS said.
UBS raised its rating on the stock to ‘neutral’ from ‘sell’ but cut its target price to 273p from 311p following a 21% in CYBG’s share price in October.
“Despite a 14-20% underperformance versus Lloyds, RBS and Barclays over this same period, CYBG is trading at a 10-20% price to earnings premium to its large cap peers,” UBS said.
But UBS said it continues to prefer larger-cap banks over the owner of Clydesdale Bank and Yorkshire Bank and remains cautious on the operational challenges facing the lender.
“We don’t think this valuation premium is justified and so see better risk / reward at Lloyds, Barclays and RBS, all rated Buy,” it said.
CYBG completed the acquisition of Virgin Money Holdings PLC last week and UBS expects to see a re-set in medium-term targets at the 2018 financial year results to incorporate the new business. UBS also believes the results are likely to show shrinking margins and confirm a more difficult loan growth outlook.
The investment bank expects earnings to peak in 2020 largely due to higher funding costs arising from the end of the Bank of England’s Term Funding Scheme, issuance costs related to the minimum requirement for own funds and eligible liabilities and slowing loan growth.
Shares in CYBG rose 3.4% to 261.8p around noon.