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Why this ASX bank stock is set to soar this morning

Brendon Lau
big four banks 16:9

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is poised to set a new 11-year record high this morning thanks to positive overnight leads, but there’s one star in the banking sector that’s likely to burn brighter than most today.

This is the CYBG PLC/IDR UNRESTR (ASX: CYB) share price as it’s London-listed stock surged 5.1% last night to 194.95 pence after management released its Capital Markets Day presentation after 4pm AEST yesterday.

This means UK investors got first dips as Aussie investors wouldn’t have gotten a chance to read the update and trade the stock yesterday.

No Brexit bamboozle

The UK bank set aside worries that Brexit would derail its growth plans by reaffirming its 2019 guidance of achieving a net interest margin of 165 to 175 basis points and less than £950 million in underlying costs.

What’s more, CYBG believes it can squeeze around an additional £50 million in cost savings from its Transformation Program following its merger with Virgin Money. This will take total synergies to circa £200 million by FY22 when cost to income ratio is expected to drop to mid-40%.

Further, management is targeting to achieve a return on tangible equity (RoTE) of more than 12% in that year and believes it can generate a CET1 ratio of around 13%, which is above the regulatory requirement.

Why CYBG may be worth adding to your portfolio

CYBG, which will be renamed Virgin Money UK PLC by the end of this year, is a different type of bank that ASX investors may not be used to. This is because it isn’t much of a dividend payer given that it’s targeting a conservative payout ratio of around 50% when the big four banks have payout ratios around 80%.

While the foreign bank won’t have much to offer to income-seeking investors with its circa 2% yield, it will appeal to those seeking growth as management is forecasting growth that’s ahead of the broader banking sector.

That’s something the big four won’t be able to achieve. Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are either struggling to keep pace with growth in the broader market or are losing market share.

This is understandable given that CYBG is a challenger in the UK market while the big four are the leaders in Australia.

But it’s for this reason that CYBG could appeal as it will help to diversify your exposure to the ASX banking sector, especially because I do not see the regional banks as good growth alternatives.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, CYBG Plc, and Westpac Banking. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of National Australia Bank Limited. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019