Company Overview: CYBG PLC is a United Kingdom-based company, which intends to be the holding company for CYB Investments Limited (CYBI) and Clydesdale Bank PLC (Clydesdale Bank). The Company will own National Australia Bank Limited's Clydesdale and Yorkshire Bank operations (the Clydesdale Bank business). Clydesdale Bank provides the United Kingdom retail and small and medium enterprises (SME) banking services. Clydesdale Bank's products and services include mortgages, current accounts, deposits, term lending, personal loans, working capital solutions, overdrafts, credit cards and payment and transaction services. Clydesdale Bank consists of approximately 120 Clydesdale Bank-branded branches and approximately 150 Yorkshire Bank-branded branches. CYBI is a holding company that undertakes limited economic activity beyond its principal activity, with all operations undertaken through United Kingdom registered entities.
 

CYB Details

Execution With respect to Key Organic Strategic Pillars: CYBG Plc (ASX: CYB) is a banking entity that was listed on ASX in year 2016, and has been gaining investors’ attention in the past couple of months. It happens to operate through retail and commercial banks Clydesdale Bank (which was established in 1838 in Glasgow), Yorkshire Bank (which was founded in 1859 in Halifax) as well as through digital banking service B, created in 2016. As on April 8, 2019, the group had the market capitalisation of $5.46 billion. It witnessed strong progress and there was continued execution against its organic strategic pillars i.e. sustainable customer growth, efficiency and capital optimisation and the group managed to deliver on its Virgin Money acquisition. The group had been adopting prudent approach with respect to balance sheet management and, thus, it ensures that deposits are raised well in advance of the lending commitments. The development of deposit business happens to be a key enabler of overall growth strategy and FY 2018 witnessed strong performance as the group steadily increased the deposit base size, and, at the same time, it maintained quality and stability of the funding. The group is managing its operations well while keeping the cost-to-income ratio under check.


Overview of CYB’s Results (Source: Company Reports)

In order to support the sustainable growth in lending, the group’s deposits witnessed the rise of £1.2 billion (or 4.2%) in FY 2018 on the YoY basis and there were significant increases in total B current account and linked savings, which encountered the growth of 96% to £2.1 billion in FY 2018 coupled with business notice and access accounts, which increased to £1.9 billion at the end of FY 2018 reflecting a 6% rise YoY. The group’s mortgage book witnessed the rise of 4.5% in FY 2018 and stood at £24.5 billion as compared to the market growth of 2.5%. Also, the group’s core SME lending portfolio witnessed the rise of approximately £400 million and stood at £7.2 billion which implies a rise of 5.6%.

In a nutshell, it can be said that the group is expected to be helped by Virgin money acquisition and the opportunities which this acquisition is expected to bring for CYBG. Additionally, the group’s focus on the investments to broaden the franchise across the target segments and regions and the focus on improving efficiency by making the network, operations and organisation more efficient and agile can also act as a tailwind for the overall growth.

Marginal Rise in Net Interest Income in FY 2018 (YoY): CYBG’s net interest income amounted to £851 million as compared to £844 million in FY 2017. The group’s NIM stood at 2.17% which reflects a fall from 2.27% since FY2017. The group had guided a reduction in the NIM in FY 2018 because of expectations of impact of the shift in mortgage mix towards a higher proportion of the lower yielding owner-occupier lending, along with continuation of competitive mortgage pricing over the last two years. However, CYBG continues to drive growth in net interest income with the help of its sustainable balance sheet growth strategy and, we expect, that this strategy might help it achieving respectable growth in NIM moving forward. Also, the active management of funding volumes and pricing can also act as a tailwind for the group in the upcoming periods. The fully loaded total capital ratio of the group stood at 15.9% and CET 1 ratio was 10.5% at September 30, 2018.

A Look at Recent Updates: CYBG PLC made an announcement that it had wrapped up the pricing of £250,000,000 9.25% fixed rate reset perpetual subordinated contingent convertible notes. These notes are convertible into the ordinary shares of CYBG if common equity tier 1 capital ratio of the group falls below 7.00%. The group had also made an announcement that they have been informed by Banking Competition Remedies Ltd that they have not got a grant from Pool A of Capability and Innovation Fund. Meanwhile, the group is having robust position in the UK SME market and it would be continuing with the existing SME growth strategy.

Robust Pipeline and Customer Retention Aided Q1 Mortgage Growth: The trading of CYBG PLC in the three months ended December 31, 2018 was in line with expectations of Board and the group made good progress with Virgin Money integration programme. The group witnessed mortgage growth of 1.5% in Q1 FY 2019 and the same stood at £60 billion thanks to the robust pipeline coming into the quarter as well as good customer retention. During the same period, the group’s SME growth was 1.2% and it stood at £7.6 billion and there were approximately £600 million of drawdowns which have underlined the strength of CYBG’s SME strategy and robust demand from the customers. The NIM of the group stood at 172 basis points (3 months annualised). The group’s NIMs were lower than FY18 because of sustained pricing pressure in UK mortgage market. There are expectations that the group would be delivering the NIM in the range of 165-170 basis points for FY 2019, and this seems to be the upper end of previous guidance range.


Customer Balances (Source: Company Reports)

The group had made good progress with respect to cost reductions and they have increased their integration synergy target to £150 million. Also, the group is on track to deliver the commitment to lend £6 billion to SME customers over 3 years by FY19 end. In Q1 FY 2019, the retail unsecured lending witnessed the rise of 0.4% which demonstrates modest credit card balance growth.

Decent Liquidity Levels Supported Scheduled Maturities: The group started the quarter with strong liquidity levels after the wholesale funding raised at Q4 FY 2018 end, which, coupled with good deposit origination at cost-effective rates, allowed the group to finance strong growth in lending in Q1 FY 2019 as well as meet the scheduled maturities for savings and term deposits. It can be said that the bank has been focusing on maintaining adequate liquidity levels which, we expect, will support its long-term growth prospects.

The group’s asset quality has been resilient with annualised net cost of risk of 22 basis points in three months ended December 2018 which was in line with the expectations of management and reflecting higher cost of risk with respect to SME and Retail Unsecured. CYBG had witnessed good progress in the reduction of underlying operating costs in Q1 FY 2019 and it is on track to deliver the FY19 guidance of <£950 million. CYBG is strongly capitalised and is having a CET1 ratio of 14.5% at 31 December 2018. As per the expectations, it is approximately 60 basis points lower than pro forma September 30, 2018 ratio which was 15.1%, mainly because of dividends and AT1 (additional tier 1) distributions and exceptional charges. We expect that the group’s resilient asset quality and strong capital position would continue to further strengthen its fundamentals and can help it addressing the industry-wide challenges which might occur moving forward.

What To Expect From CYBG Moving Forward: Even though, the political situation in UK is a bit uncertain and the impact on UK economy is yet to be ascertained, CYBG is focused towards unlocking opportunities from the acquisition of Virgin Money as well as delivering the margin and cost guidance for FY 2019. Considering the broadly stable pricing environment, CYBG is expected to post NIM between 165-170 basis points for FY19 which includes impact of the group’s review of credit card EIR accounting approach and reflects adjustments which have been made to key assumptions which are now in line with market norms, demonstrating more conservative basis.

The group had stated that net mortgage lending growth for full year is expected to be lower as the group has been focusing towards optimisation of volume and value. However, there are anticipations that SME and unsecured lending growth would remain robust. As per the annual report for FY 2018, the group had stated that, between FY 2020-FY 2021, it would begin the Virgin Money rebranding and would also be exploring strategic growth opportunities.


Integration Timeline (Source: Company Reports)

Stock Recommendation: It can be said that, in the past, the stock of CYBG had delivered decent returns as, in the time frame of previous three months, the stock delivered 13.06% return while, on the YTD basis, it posted 16.87% return. The group is having an annual dividend yield of 1.46% and CYBG’s enhanced prospects after the bolt-on acquisition means the group can deliver on the progressive dividend ambitions moving forward.

Additionally, CYBG is expected to be aided by Virgin Money as use of Virgin Money brand, along with CYBG’s customer-centric product range and service model, might lead to increased consumer interest and advocacy throughout UK over time, generating increased customer acquisition as well as greater customer retention. Also, there is a potential to build partnerships with other Virgin companies in order to offer innovative products to enlarged customer base of CYBG. From valuations’ perspective, the group’s stock seems to be attractive given the P/B ratio of 0.58x as compared to the peer median of 1.25x (this implies that the stock is slightly undervalued). The group’s stock is also trading near the 52-week lower level, thus, providing a decent opportunity to make an entry. For an expected single digit P/E value and forward 24 months consensus EPS of around $ 0.5, the stock seems to be witnessing a single digit upside. On the backdrop of above-mentioned factors coupled with the current trading juncture, we give a “Buy” recommendation on the stock at the current market price of A$3.830 per share.


CYB Daily Chart (Source: Thomson Reuters)

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