Belfast Telegraph

CYBG could be heading for full-year loss, analyst warns

The group owns the Clydesdale and Yorkshire banking brands.

The owner of Clydesdale and Yorkshire banks has experienced little reprieve amid heightened competition in the mortgage market and could now be on track for a full-year loss, an analyst has warned.

CYBG’s interim results showed a reduction in mortgage drawdowns in the three months to June 30 due to lower applications earlier in the year, and stressed that the mortgage market “remains extremely competitive”.

Pricing pressure in its retail banking operations has been offset in part by improved margins in its division serving small and medium-sized businesses.

However, it is still expecting full-year mortgage growth to be at the lower end of its guidance range.

Mortgage growth has risen 3.8% to £24.2 billion in the year to date, while growth in its core small and medium-sized business division grew 4.7% so far this year, with £420 million of gross loans and facilities written in the third quarter.

Conduct and restructuring costs have taken their toll, and after the material PPI charge in the first half of FY2018, we forecast a loss in FY2018 Investec banking analyst Ian Gordon

Deposit balances have risen 4.5% so far this year.

It also noted that complaints over the misselling of payment protection insurance (PPI) “remain elevated”, having already been knocked by an extra £350 million charge in additional provisions in the first half of the year.

Chief executive David Duffy said it was a “solid performance” for the lender, but questions have been raised over the bank’s ability to deliver full-year profits.

Ian Gordon, a banking analyst at Investec, said it was an “underwhelming” interim statement which “illustrates the challenges which should ensure a loss in FY2018”.

“CYBG has delivered steady income growth alongside absolute cost reduction through FY2016/17 (full year), which we broadly expect to continue through FY2018 to FY2020, driving further improvement in underlying profit before tax,” he said.

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Virgin Money is being taken over by CYBG (PA)

“However, conduct and restructuring costs have taken their toll, and, after the material PPI charge in the first half of FY2018, we forecast a loss in FY2018, before a return to profit in FY2019.”

Mr Gordon added that while CYBG is assuming the number of PPI claims will slow in 2019, this view is “out of line” with fellow lenders and “therefore somewhat heroic.”

But the lender’s boss, Mr Duffy, said: “We have delivered another solid performance this quarter, achieving sustainable lending and deposit growth in a highly competitive market while maintaining a stable net interest margin and delivering further cost and process efficiencies in the business.

“We remain on track to deliver our guidance for full-year 2018.”

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CYBG chief executive David Duffy (Clydesdale Bank/PA)

While Mr Duffy said the economic and political environment in the UK remains uncertain, CYBG was focused on its strategic objectives and further growth opportunities, including funding that will be made available through the RBS Alternative Remedies Scheme.

The scheme is comprised of a £425 million “capability and innovation fund”, meant to help bidders develop their current account, lending and payments offerings for business customers.

A separate £350 million incentivised switching scheme that will encourage SME customers to ditch their RBS account for rival banks will open just days later.

The money will come from Royal Bank of Scotland as part of conditions attached to its £45 billion Government bailout during the financial crisis.

“We plan to play a significant role following confirmation of the scheme timetable,” Mr Duffy said.

CYBG – which has reached a £1.7 billion deal to take over Virgin Money – said it expects the all-share offer to be completed in the fourth quarter.

The deal is still subject to shareholder and regulatory approvals.

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