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Bank's fortunes tied to the UK economy
Thursday 31 Aug 2017 Author: David Stevenson

Banking group CYBG (CYBG) in 2016 achieved its first statutory profit in five years. Its ambition to pay an inaugural dividend for the September 2017 financial year now seems increasingly likely to be realised.

The bank’s share price has risen by more than 50% since the company was floated by previous owner National Australia Bank in February 2016. We see scope for further upside from the stock.

Initially two separate entities, Clydesdale and Yorkshire bank, the combined company has a UK regional focus, including in Scotland where it trades under its Clydesdale name.


It has around 2m current account holders, which CYBG’s chief financial officer Ian Smith says gives it a strong base to lend. Its mortgage loan book is growing steadily, up 5.8% in the nine months to 30 June.

Guy Stebbings, analyst at investment bank Exane BNP Paribas, says a combination of ‘encouraging mortgage volume trends, solid margin dynamics and ahead-of-plan cost take out is supporting a more attractive near term earnings story’.

Competing with the big boys

‘We’re in a unique position in the true definition of the word; we’re one of the smaller players allowing us to be more agile,’ says Smith. CYBG looked set at one point to buy Royal Bank of Scotland’s (RBS) Williams & Glyn business, which would have added 300 branches to its stable, before the deal collapsed.

The bank still has to address similar problems to those faced by its larger FTSE 100 peers such as payment protection insurance (PPI) claims.

Equity research firm CLSA says it is ‘cautious over the conduct issues’ (like PPI) but nonetheless ‘remains optimistic’.

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Proxy for the UK economy

‘We do well if the UK does well. We’re a microcosm of the UK economy,’ says Smith. Prospective investors therefore need to take a view on the impact Brexit might have on economic conditions.

Exane’s Stebbings warns the bank’s ambition of achieving a double digit return on equity by 2019 is ‘unlikely’ although he also adds the current trajectory ‘looks promising’ for eventually achieving this aim.

The bank trades on price to book ratio of one. Some may consider this expensive relative to peers.Barclays (BARC) trades on a ratio of 0.7 times, for example. CYBG’s rating reflects its growth potential as a smaller player in the UK market.

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