About: CYBG PLC provides commercial banking services for retail and institutional customers. The Company offers savings accounts, telephone banking, insurance, investment management, loans, credit cards, cash management accounts, financial planning, mortgage, and internet banking. CYBG operates in the United Kingdom..

Why it is in the portfolio: This bank offers a very different profile to the local banks - one whose business appears to be on the mend after a financial crisis, rather than one that looks vulnerable to one. Being UK based, very much focused on traditional banking and having had its fair share of idiosyncratic issues under NAB's ownership, its risk (and return) profile has been very stock specific and very unlike the local. There fore we feel it offers good diversification within the concentrated banking sector in Australia.

Fundamentals: At under 1 times Price/Book Value it is not completely alone amongst offshore banks but is still at the cheap end of the spectrum. Theoretically that means that if the company liquidated all of its assets at the values in its accounts and paid of all its debt then there would be a surplus for equity holders. CBA now trades at over 2 times book value and while that appears expensive a healthy bank might be expected to trade up to around 1.5 times or more (taking into account the value of future earnings as well as assets on the balance sheet). It is also much less leveraged and much less complex than the local banks. Therefore there is significant upside if the stock continues to improve its reputation with investors (it was up over 30% in late 2017 off the back good operating performance as the local banks languished.

What could go wrong: CYBG represents a fairly concentrated bet on the UK economy and housing market but with modest levels of leverage it is perhaps that perception that could be most damaging in the short term if fears of chaotic Brexit materialise. After the vote CYBG was down over 30%, much more than other UK banks. Although it bounced back, it and other stocks with a sizable UK presence such as the fund managers, BT and Janus Henderson, appeared to act as a lightning rod for skittish Australian investors. All that to say that fundamentally it appears less risky than the big Australian banks but short term share price volatility will probably be higher.