UBS upgrades CYBG but still prefers the bigger banks

UBS upgraded its outlook on CYBG from ‘sell’ to ‘neutral’ on Thursday after the banking company’s shares dropped 21% throughout October.

However, analysts also stated that they continue to view CYBG’s operational challenges with caution and favour investment in larger and more established banks, observing a superior risk to reward ratio at Lloyds, Barclays and RBS, which have all been rated as ‘buy’.

CYBG has weaker capital generation, lower dividend yields, higher reliance on mortgages and a weaker funding mix than its larger competitors, along with all the challenges of a smaller scale operation.

“Despite a 14-20% underperformance versus Lloyds, RBS and Barclays over this same period, CYBG is trading at a 10-20% P/E premium to its large cap peers. In recognition of the sector's de-rating we are increasing the CoE used in our CYBG Gordon Growth Valuation to 12.5% from 11.5%,” said a note from UBS analysts.

Consequently, CYBG’s target price has been reduced from 311p to 273p.

CYBG is a UK challenger bank in the UK that focuses on markets in Scotland and Northern England with its Clydesdale Bank and Yorkshire Bank brands.

Earlier in the month the company completed its acquisition of Virgin Money after acceptance by both shareholder groups in September, with integration of the two companies expected to go ahead during the current quarter.

The analysts expect that full year results will come with a dialing back of medium-term targets in reflection of the task of integrating Virgin.

CYBG’s shares were up 3.56% at 262.00p at 1121 BST.