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CYBG's Virgin buy won't disrupt bank sector, JP Morgan says

By Sean Farrell

Date: Thursday 21 Jun 2018

CYBG's Virgin buy won't disrupt bank sector, JP Morgan says

(Sharecast News) - CYBG's planned purchase of Virgin Money will form a stronger bank but is unlikely to shake up the UK banking market, according to analysts at JP Morgan Cazenove.

Upgrading CYBG, which trades as Clydesdale and Yorkshire, to 'neutral', JP Morgan said the takeover was "highly accretive" with high cost synergies of £120m. The analysts increased their price target for CYBG to 310p from 270p.

Announcing the purchase on 18 June, CYBG said combining with Virgin would create a bank big enough to "disrupt the status quo" in UK banking, which is dominated by four big high street lenders.

The post-merger group will trade at 9.6 times 2020 earnings and 8.2 times 2022 earnings, JP Morgan calculated. Those multiples are a premium to Lloyds Banking Group and Royal Bank of Scotland, which offer higher dividend yields and share buybacks, the analysts said.

The analysts restated their 'overweight' ratings for Lloyds and Barclays and said second-quarter results would support both banks' share prices.

Consolidation among the UK's smaller banks is likely to continue as funding costs increase and customers switching to digital banking increases demands for investment spending, the analysts said.

The big UK banks are also reclaiming some lost market positions, strengthened by more capital and reduced legacy problems. More acquisitions of smaller banks will be good for the sector's margins and returns, JP Morgan said.

Competition in the sector is shifting from low-risk mortgages towards higher margin retail products and SMEs, JP Morgan said. Unemployment is the most important factor for loan impairments.

"Although there has been some tick up in insolvencies and a weaker housing market, employment data for the UK continues to show resilience which implies continued low impairment," the analysts said.


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