The owner of Clydesdale and Yorkshire banks has slumped into the red with half-year losses of £95 million after taking a hit from the payment protection insurance (PPI) scandal.
Leeds and Glasgow-based CYBG – which is in talks over a potential £1.6 billion takeover of Sir Richard Branson’s Virgin Money – was left nursing the loss after recently taking an extra £350 million charge for PPI mis-selling claims ahead of the complaints deadline.
The new provision, which was revealed last month, saw CYBG take a £202 million pre-tax charge for the first half, as it said £148 million was covered by a conduct indemnity deed with National Australia Bank.
CYBG also put by another £18 million for “other legacy conduct issues” during the half-year to March 31.
Its pre-tax losses came against profits of £46 million a year earlier.
On an underlying basis, it posted a 28% rise in half-year pre-tax profits to £158 million.
Shares fell 4% after the results.
CYBG cautioned it expects trading conditions to “remain challenging”, with slowing consumer spending and borrowing and a competitive mortgage market.
It said: “Spending has slowed and businesses have been holding back investment, which has had some impact on demand, but with credit conditions remaining benign.
“In the mortgage market, the economic uncertainty has reduced customer demand, while competition has remained intense and this has resulted in a challenging pricing environment.”
Its net interest margin – a key measure for retail banks – slipped in the fist half, highlighting the pressure on challenger banks such as CYBG and the rationale behind its proposed takeover of Virgin Money.
The deal, which was revealed earlier this month, would see Virgin Money shareholders own around 36.5% of the new business.
It could mean a major payout for founder Sir Richard Branson, whose Virgin Group holds a controlling stake in the lender.
But it is by no means a done deal, according to banking expert Gary Greenwood at Shore Capital, whose concerns include price and complications of combining IT systems.
He said: “We think it is by no means certain that CYBG will make its proposal formal when the deadline for making such an offer expires on June 4.
“Even then, we think it may need to sweeten its offer in order to get the recommendation of Virgin Money’s management, with a larger premium meaning that more of the benefits would accrue to Virgin Money’s shareholders.”
Half-year results showed CYBG grew gross mortgage lending by 6% year-on-year in the first half, with overall customer lending growth rising to £32.7 billion from £32 billion a year ago.
But it warned that mortgage lending could slow further in its third quarter after some disruption to broker applications following a move to bring mortgage processing back on-shore late last year.
It now expects mortgage growth at the lower end of its expected range over the full year as it also faces a “subdued” mortgage market and “fierce competition”.
CYBG chief executive David Duffy told the Press Association the wider mortgage market was now “stabilising but at a competitive level”.
He added Britons were “being cautious ahead of some clarity” from the Brexit negotiations, with consumer spending slowing and business investment on pause.
But Mr Duffy remained tight-lipped on its plans for a formal bid for Virgin Money, ahead of its June 4 deadline to make a firm offer or walk away.