Is this bank set to become a dominant UK player after bid approach?

Updated: 
HSBC, Paris

CYBG(LSE: CYBG) has announced that it has begun discussions with RBS about acquiring the Williams & Glyn operations. Clearly, there's no guarantee that a deal will be struck. However, it shows the ambitions CYBG has to increase its exposure to the UK economy. Will this mean that it becomes a key player in the UK banking industry?

CYBG has a sound growth strategy for the long term. Up until the EU referendum, its future seemed to be relatively bright and along with a number of other challenger banks, it was helping to improve choice and competition for consumers.

However, the outlook for the UK economy is now far less certain than it was just a handful of months ago. Confidence in the UK economy has come under pressure and this has caused the value of the pound to weaken. The Bank of England is forecasting a rise in unemployment to 5.6% and a major slowdown in growth in 2017. And with interest rates being at rock-bottom and likely to remain low, net interest margins for banks may remain relatively tight over the medium term.

Of course, it could be argued that now is a good time for CYBG to buy Williams & Glynn from RBS. Its valuation will almost certainly include a discount for the aforementioned risks the UK economy now faces. However, this discount could widen further over the coming months as the UK government invokes Article 50 of the Lisbon Treaty and negotiations begin regarding the terms of the UK's relationship with the EU.

Therefore, it could be the case that CYBG is jumping the gun on an acquisition in the UK at the present time. After all, it remains a lossmaking company that has a tough outlook thanks to Brexit.

A better buy?

As a result, it may be a better idea for investors to focus on a bank with a more stable track record of profitability and offering greater geographical diversity. HSBC (LSE: HSBA) has a major presence in the UK and is one of the big four banks. However, it also has exposure elsewhere, notably in Asia where it's well-positioned to capitalise on rising wealth and increasing demand for financial services.

This is particularly relevant in China, where the economy is undergoing a transition towards being more consumer-focused. This should mean that demand for credit rises over and HSBC could benefit from this. Alongside this additional growth potential, HSBC's geographical diversity also means that its risk profile is reduced, since it's less dependent on the outcome of Brexit negotiations than is the case for CYBG.

HSBC also has a better track record of profitability. It came through the credit crunch in a strong position relative to many of its sector peers and remains highly profitable. This contrasts with CYBG's more uncertain profit outlook, thereby making HSBC a lower risk as well as higher reward option at the present time.

But will this stock outperform HSBC?

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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.