Purchase of Clydesdale Bank (CYB.ASX)

Within the Australian equity component of investor accounts, we have bought Clydesdale Bank (ASX: CYB), the UK based full-service bank focused on consumers and small and medium-sized enterprises (SMEs).

We are positive on the medium-term outlook for CYB for the following reasons:

  • It is well positioned to grow its loan and deposit book due to structural tailwinds for UK challenger banks, reductions in its capital requirements, and its ability to source deposits at costs lower than other challenger banks;
  • The business has significant balance sheet capacity to fund growth and should be able to increase its dividend payout ratio;
  • Merger with Virgin Money in the UK we see as complementary to the existing business and product lines while also providing opportunity for further cost out and simplification benefits;
  • CYB will be completely rebranded to Virgin Money which strategically enables management to improve the mix of assets by growing market share in the higher-margin business and personal lending portfolios while maintaining market share in the more competitive UK mortgage market;
  • Strength in combination of CYB, a traditional bank with a large customer base, network and strong capital position with a mostly digital neo-bank in Virgin Money; and
  • Short term uncertainty regarding the economic implications of Brexit has created a significant discount to what we believe to be the intrinsic valuation of the business.

We have funded the purchase through the sale of Ansell (ASX: ANN). ANN is a well-run business but at current valuations we see it as close to fully valued compared with the relative value in CYB. The positive catalysts in CYB flowing from the Virgin Money (VMA) acquisition and rebrand strategy mean that we see CYB as a more attractive proposition.

As with all equity investment, CYB is not without risk. While the strategic rationale behind the VMA merger is sound, as with all mergers, there remains the risk that the value of merger synergies (e.g. economies of scale, best practice, the sharing of capabilities and opportunities) may be overestimated.

For more information refer to the Clydesdale Bank Snapshot.

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