There aren't many reasons to feel excited about our bank shares in the near-term but there may be one exception.
The CYBG PLC/IDR UNRESTR (ASX: CYB) share price may be set for a sustained rebound as the UK bank unveils its full-year results next Tuesday.
The profit announcement could help trigger a re-rating in the CYB share price which has crashed by 20% in the past three months when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is down 9%.
Even out-of-favour big bank stocks have performed better with the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price all posting more modest falls over the period.
Why has the CYBG share price been falling?
Turmoil in the UK government over Brexit is one key reason for CYBG's underperformance and I think the stock is oversold as investors aren't paying attention to the fundamentals.
The stock is cheap, particularly in the wake of its merger with Virgin Money (VM). Bell Potter noted that if you looked at the market caps of CYBG and VM before the merger announcement and post the news, you will find a circa £500 million ($878 million) shortfall.
What this says is that the market is only pricing in 70% of VM's value and none of the expected cost synergies.
That is too pessimistic as I believe there is a strong rationale in merging the companies. Not only will the combined group give CYBG increased scale to compete against the big UK banks, but CYBG and VM complement each other's strengths and weaknesses.
What analysts are saying
CYBG has a track record in extracting synergies, according to the analysts at Macquarie Group Ltd (ASX: MQG).
"In our view, VM provides CYBG with a stronger platform to grow in the more affluent Southern regions of the UK, while CYBG can leverage its digital and business banking capabilities across a larger client base," said Macquarie.
"We expect CYBG over time to deliver superior revenue growth to its larger peers and with declining expenses, we anticipate stronger earnings growth and improving returns."
Once investors catch on to CYBG's improving returns, the stock should re-rate. Macquarie estimates that the bank will be able to deliver a return on tangible equity of 12% to 13% over the medium term.
That's pretty impressive when compared to the falling return on equity of our big four banks.
Both Bell Potter and Macquarie are urging investors to buy the stock with a price target of $6.35 and $6.30 per share, respectively.
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