Since its February IPO, shares in Clydesdale and Yorkshire Bank holding company CYBG (LSE: CYBG) have soared by 39%. That’s despite the uncertainty across the banking sector resulting from the EU referendum result. As such, many investors may believe that the company’s outlook is all positive. However, CYBG remains a relatively risky buy.
A key reason for this is the uncertainty that’s likely in the UK banking industry over the next few years. Much of this will be caused by Brexit as it represents a major political and economic change. UK-focused banks such as CYBG could be hurt by a mix of lower interest rates, rising unemployment, slow asset growth and investor uncertainty towards the financial services sector. As such, CYBG’s stunning share price gains may not be repeated in the coming months.
Of course, CYBG is making strong progress with its turnaround strategy. For example, in its most recent quarter it was able to remain on track to meets its full-year guidance of a cost reduction of £730m. This should improve its efficiency and allow it to become more competitive versus sector peers. Similarly, CYBG’s capital strength continues. Its core equity tier 1 (CET1) ratio rose to 13.5% as at 30 June.
Furthermore, CYBG successfully launched its new B offering. This is a digital solution that creates a more modern and user-friendly experience for customers. It could lead to improved customer loyalty as well as a higher degree of cross-selling as the banking industry continues to play catch up with an increasingly online world. And with CYBG’s mortgage book growing by 8% to £21.7bn in the first nine months of the 2016 financial year, it has performed well in a buoyant UK property market.
Now for the negatives…
Despite this, it could struggle to perform as well as a number of its banking sector peers thanks to its lack of geographical diversity. As mentioned, Brexit is expected to cause an increase in unemployment and a slowdown in economic growth according to the Bank of England. While the effects of Brexit haven’t yet been evident, the reality is that article 50 of the Lisbon Treaty hasn’t yet been invoked.
Therefore, things could get worse before they get better for the UK economy. In such a situation, having exposure to non-UK markets could be a major plus for banking shares, which are highly susceptible to economic downturns.
In addition, CYBG remains a turnaround stock. This means that its financial position is arguably not as strong as is the case for many of its banking sector peers. CYBG is in the process of reducing costs and making the necessary changes as a business to improve profitability. Therefore, while it has a relatively sound CET1 ratio, it may not be as financially strong as more diversified and well established peers. Should the UK economy endure a tough period, this could mean that CYBG’s share price fails to rapidly rise as it has done since the IPO in February.
