The one ASX bank share brokers love right now

Banks may be out of favour with investors in this climate but this bank stock just got upgraded by a top broker. Here's why…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share price of CYBG PLC/IDR UNRESTR (ASX: CYB), or Clydesdale Bank, is rallying after the dual-listed UK-bank got upgraded by Morgans to reflect its acquisition of Virgin Money.

The stock jumped 1.9% to $6.07 yesterday compared to the 0.4% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after the broker lifted its recommendation on the stock to "add" from "hold".

The move to merge with Virgin Money is almost a done deal as it has won the approval of the target's board and Morgans thinks it's a game changer for Clydesdale Bank.

"We believe the acquisition of VM [Virgin Money] significantly changes the investment thesis for CYB. CYB intends to rebrand all its businesses to Virgin Money, effectively making it the UK's new VM," said Morgans.

"We view this is a stronger brand than any of the brands currently in CYB's stable."

The upgraded shouldn't come as a surprise as I had flagged this outcome several weeks ago and there's more upside from the merger than just branding.

The combined balance sheet of the two challenger brands in the UK will allay worries about the impact of further payment protection insurance (PPI) compensation claims against Clydesdale Bank. These concerns have been one of the factors dragging on the bank's share price recently.

The £120 million in cost synergies should also translate to around a 13% increase to Clydesdale Bank's earnings per share (EPS) too. This is on top of other operational synergies such as changes to the funding mix from encouraging Virgin Money's customers to open a transaction account.

The merged group's EPS should get a further circa 5% uplift for every 10% of Virgin Money's customer base converting to a current account, added Morgans.

"CYB has said that the pro forma CET1 ratio of the combined group on day 1 is expected to be >12.0%," said the broker.

"We are forecasting the combined entity to deliver an underlying RoTE [return on tangible equity] of 13% in FY20. If such a RoTE is sustained, and with mid-single digit loan growth, we believe the combined entity can deliver a dividend payout ratio of ~60% over time."

This could translate to a 25 pence dividend payment to shareholders in the 2019 financial year ending in September. That would equate to a yield of around 7.4% based on the current exchange rate.

The payment of such a dividend would be a re-rating event for the stock, in my view. Up to now, income investors have ignored Clydesdale Bank as it pays a next-to-nothing dividend. A juicy and growing dividend will change all that.

Clydesdale Bank's path to a re-rating stands in contract to our banks such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), which are facing legal and regulatory pressures at a time when the local housing market is falling.

Even regional banks like Bendigo and Adelaide Bank Ltd (ASX: BEN) are unlikely to escape reputational damage from the Banking Royal Commission.

For this reason, I have stayed underweight on the banks with the exception of Clydesdale Bank. This won't change in the short-term at least.

This isn't the only stock tipped to do well. There are other stocks poised to outperform the market, according to the experts at the Motley Fool.

Click on the link below to find out what these stocks are.

Motley Fool contributor Brendon Lau owns shares of CYBG Plc and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »