IN THE KNOW: UBS Thinks CYBG's Share Price Fall Is Unjustified.
(Alliance News) - UBS upgraded CYBG to Buy from Neutral, saying the challenger bank's shares are oversold and any net interest margin guidance at the annual results in November will act as a positive catalyst.
The Swiss bank cut its price target to 170 pence from 195p. CYBG shares were up 3.7% at 146.90p, the best performer in the FTSE 250 on Monday.
UBS analyst Charmsol Yoon highlighted that CYBG shares are down around 30% since the trading update, underperforming the sector by 20% and UK banks by 15%.
Last month, CYBG had said it remains on track to deliver an annual performance in line with guidance despite a reduction in margin and mortgage lending in the third quarter.
The analyst said the share price drop suggests market expectations are low and that historically, CYBG's share price has been highly sensitive to net interest margin performance.
"Lower swap rates will widen mortgage spreads and recent data shows that CYBG has managed not to pass the lower swap rates on to customers, lifting CYBG's and Virgin Money's 2-year front-book spreads by 9 basis points and 20 basis points, respectively, since the first half of 2019. Even if we assume a 50% pass-through from here, we expect NIM to rise from 1.60% in fourth quarter to 1.63% in 2020, and further to 1.68% in 2021," Yoon said.
As such, Yoon thinks NIM guidance to be announced at full year results will be a key catalyst.
"We view that the market expects further earnings per share cuts on expectations that NIM will continue to shrink in 2020. We see this as unlikely and model a rising NIM from 2020, with EPS rising sharply from 2021 on the back of expanding NIM and cost savings. We think the sharp fall in the share price is unjustified, and therefore upgrade the stock to Buy," the analyst said.
By Arvind Bhunjun; firstname.lastname@example.org
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|Date:||Aug 19, 2019|
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