The owner of the Clydesdale Bank and Yorkshire Bank, which completed its £1.7bn acquisition of Virgin Money last year, announced on Wednesday that it would rebrand itself by the end of the year.
CYBG also said it plans to bring down operating costs to less than £780mln by 2022 from just under an estimated £950mln in 2019.
“Management have a strong track record of delivering on cost reduction and guiding on absolute cost targets,” RBC said.
“The growth targets, in our view, are relatively low and achievable particularly given the strength of the Virgin brand in the UK.”
RBC raised its recommendation on CYBG to ‘outperform’ from ‘sector perform’ and maintained its target price at 250p.
CYBG one of RBC's top picks
Following the rebrand, CYBG plans to grow low cost relationship deposits and skew the mix of the loan portfolio to 75% mortgages, 15% business, and 10% unsecured, RBC pointed out.
RBC predicts a 2% compound annual growth rate (CAGR) in mortgages and 9% CAGR in both unsecured and small and medium enterprises lending for 2019 to 2022.
The broker thinks the change of mix in lending should enhance the net interest margin (NIM) – the difference between interest earned on loans and money paid on deposits. NIMs have come under pressure recently amid tough competition in mortgages.
RBC expects CYBG to post an NIM of 1.68% for 2019, falling to 1.65% in 2020 and rising to 1.7% in 2020.
“We expect that in the longer term as the reinvigorated Virgin Money brand grows that cost of deposits can fall even more than we have assumed,” it said.
RBC downgrades Paragon
It downgraded its rating to ‘underperform’ from ‘sector perform’ and lowered its target price to 410p form 440p on valuation grounds.
RBC believes Paragon is the stock least appropriately pricing in Brexit risk among the UK banks.
“Paragon shares have outperformed UK banks this year and trade 30% higher than post EU referendum lows whereas other UK banks trade closer to this level,” RBC said.