Jefferies upgrades CYBG, downgrades Virgin

Jefferies changed its stance on challenger banks CYBG and Virgin Money on Monday, upgrading the former as it downgraded the latter.

It said the 8% pullback in CYBG shares year-to-date is a buying opportunity, as it lifted the stock to 'buy' from 'hold'. It forecasts an 11% return on tangible equity in 2010 versus 7% in 2017, with return potential boosted by the upcoming catalysts of internal ratings based and SME growth via the RBS remedies package.

"We see CYBG as a big winner from the RBS remedies package, with SME customers likely to be on-boarded as soon as June," it said.

"A previously aborted bid for Williams & Glyn was made in the knowledge that there was a 90% product capability match between the banks, with CYBG already making a push into its traditional heartlands of the Midlands/North West. As such, we increase our SME loan compound annual growth rate through FY20 by two percentage points to 6%."

Meanwhile, Jefferies downgraded Virgin Money to 'hold' from 'buy', saying the shares will remain a "value trap" until the market sees proof of concept of the digital strategy, which is likely more than a year away.

The bank cut its 2019-21 pre-tax profit estimates by 13%, mostly on the back of lower mortgage growth aspirations versus prior expectations.

At 1550 GMT, CYBG shares were up 0.8% to 317.60p and Virgin shares were down 1.5% to 270.60p.