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CYBG and Virgin Money shares fall amid doubt on savings after merger

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CYBG and Virgin Money shares fall amid doubt on savings after merger

CYBG PLC has promised annual cost savings of £120 million a year following its all-share merger with Virgin Money Holdings (UK) PLC which CYBG said will see the loss of 1,500 jobs.

Both CYBG's and Virgin Money's share prices fell sharply following the announcement of their merger June 18. CYBG's shares were down as low as 299 pence per share off their opening price of 310.80 pence, while Virgin Money's shares fell to 343.40 pence after opening at 360.60 pence. They opened June 19 at 299.80 pence and 342.48 pence, respectively.

CYBG offered 1.2125 shares for each Virgin Money share, valuing it at £1.7 billion in total.

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John Cronin, an analyst at Goodbody Stockbrokers, said CYBG's management, led by CEO David Duffy, "struggled a little" to respond to concerns about its ability to extract cost savings in the deal during a call with analysts June 18.

However, Cronin described the cost savings announced as "pretty conservative" and said "there is much more upside to this number in the eyes of CYBG management in our view."

The deal will result in the creation of the U.K.'s sixth-largest bank by assets and will see Virgin Money shareholders, including Virgin Group founder Richard Branson, own 38% of the merged group.

It will also see the gradual phasing out over the next three years of the Clydesdale Bank and Yorkshire Bank brands and of CYBG's digital banking operation "B," as they are rebranded under the Virgin Money name, an exercise which will cost £60 million.

National brand

The aim, said CYBG, is to create a national competitor with a full-service offering for retail and small and midsize business banking underpinned by innovative technology while making full use of the "iconic" Virgin Money brand.

"First, this is about creating a bank with sufficient scale to become a proper national brand," said Anthony Thompson, head of corporate affairs at CYBG.

"Then, the Virgin brand has 99% brand recognition across the U.K. and Virgin Money has built up a very strong reputation for customer service and has proved to be a very successful brand on the ground at its northeast of England headquarters. Finally, we also have a proven technology platform at CYBG which we have invested heavily in. It is Open Banking ready, so we will gradually migrate Virgin Money customers on to it."

The bank promised there would be no "big bang" migration of the sort which has caused TSB such problems as it tried to move its customers on to a new tech platform.

Open Banking refers to the series of reforms, prompted by regulators and aimed at increasing competition in the market, that allow customers to share personal financial data with third-party providers.

Virgin Money has relatively few personal current account customers, but is strong in mortgages, credit cards and investments, while CYBG has personal current account banking and a strong tradition of small and midsize business banking.

Staff reduction

CYBG has agreed a deal with Branson's Virgin Group to use the Virgin brand which will see a £12 million payment in the first year rising to £15 million in the fourth year, plus an additional yearly royalty based on 1% of the combined group's turnover.

About 16% of the combined workforce of 9,500 staff is expected to go and CYBG said it hoped to achieve this via attrition — when staff leave and are not replaced. It declined to say how many of the 250 branches of the combined group would be closed. But the group plans to retain Virgin Money's headquarters in Newcastle in northern England for three years.

CYBG said about 30% of the cost savings will be delivered by the end of 2019 with the remaining 70% by the end of 2020. The bank expects to incur costs of £240 million in addition to its £60 million rebranding costs to reach its annual cost-saving target of £120 million. Branch cuts will provide only 10% of the savings with the majority coming from cost and operational efficiencies.

Jayne-Anne Gadhia, who has been Virgin Money CEO for 11 years, will become a senior adviser to CYBG's Duffy, though there is no indication of how long she will remain in that role.

The combined group will be well capitalized, said CYBG, with a "significant buffer to regulatory minimum capital requirements" and common equity Tier 1 ratio of 12%.

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