Analysts at Barclays Capital have upgraded their stance on Virgin Money’s new owner CYBG PLC (LON:CYBG) but they still prefer Lloyds Banking Group PLC (LON:LLOY) and Royal Bank of Scotland PLC (LON:RBS).
In a note to clients, Barclays raised its rating on CYBG to ‘equal weight’ from underweight’ but cut its target price to 220p from 230p, saying it remains cautious on earnings and continues to see downside risk to consensus forecasts.
“However, with the valuation in line we see balanced risk-reward,” Barclays said.
Margin pressures continue
Barclays expects pressure on CYBG’s net interest margin – the difference between interest earned on loans and deposits paid – to persist beyond 2019.
The investment bank said the margin pressure is driven by rising liability costs as CYBG issues expensive instruments compliant with the minimum requirement for own funds and eligible liabilities (MREL) while replacing cheap money from the Bank of England’s Term Funding Scheme, which closed last year.
However, Barclays noted that funding spreads have eased in recent weeks for CYBG.
“Weaker margin of our earnings estimates being 10% below company-compiled consensus.”
CYBG at PE-premium to Lloyds and RBS
Barclays added that CYBG has underperformed Lloyds and RBS by 12% in the year to date but remains at a 20% price-earnings premium to its larger rivals on 7.5 times.
Looking ahead, Barclays will monitor developments on Brexit, mortgage pricing and wholesale funding markets.
It expects the focus to shift CYBG’s capital markets day in June when the bank has indicated it will provide an update on its strategic and financial targets.
There will be particular attention paid to whether CYBG can extract additional costs from its Virgin Money integration or provide figures on potential revenue synergies, Barclays said.
Barclays will also look for an update on payment protection insurance mis-selling claims as the Financial Conduct Authority’s August deadline for making complaints looms.