How long have you held the stock?

Since February 2016.

What do you like about it? 

It has the potential for self-help by driving the cost to income ratio down from over 70% to a range of 55%-58%.

The company is planning to move to advanced accreditation under Basel 3, which will allow them to reduce their risk weights on mortgages and release excess capital.

The sell off of the British Pound has removed the chance of further interest rate cuts, which would have pressured margins. The worst of Brexit is close to being priced in, so there is also upside as the currency stabilises.

How is it better than its competitors?

Clydesdale is a regional mortgage lender with a presence in Scotland, north England and Yorkshire. This gives it a lower risk profile than larger banks, with less commercial lending exposure and less exposure to the more expensive London property market. It has the opportunity to move more in line with its competitors on costs and capital, which gives it greater earnings upside. It has a strong balance sheet after being spun out of National Australia Bank, whereas many of its competitors are still recovering from the financial crisis.

What do you like about its management?

CEO David Duffy has been with Clydesdale since mid 2015 and has extensive banking experience in the UK and abroad. He was also chief executive at Allied & Irish, where he was successful in achieving similar cost out targets. They have a flexible approach to reaching targets, shifting between revenue growth and cost out, which gives them the ability to adjust to shifts in market conditions and challenges such as Brexit.

What is your target price on the company?

$6.50 but that is dependent on currency movements.

At what point would you sell it?

Execution on the cost out program and release of excess capital that leads to a share price re-rating would be an exit point. On the negative side, a worse outcome on Brexit that leads to economic weakness and pressure on house prices and the currency would drive a sale.

How much has it added (subtracted) to your overall portfolio over the last 12 months?

It has added over 0.2% to portfolio performance in excess of the market.

Is it a liquid stock?

Yes, it is in the top 100 largest stocks listed on the ASX and turnover recently has been in excess of $5 million per day.

Where do you see the value?

Stocks that are demerged out of larger companies often present opportunities. The potential for management to have greater control, over both costs and strategic direction and growth, often leads to a better than expected earnings performance. This is particularly apparent with Clydesdale with the potential for some easy wins on the cost front. The market has been ignoring it recently as fears over Brexit became elevated.

Source: Yahoo!7 Finance

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