CYBG profit progress wiped out by looming PPI hit
Virgin Money UK
1,738.50p
16:24 24/04/24
Clydesdale and Yorkshire Bank owner CYBG increased underlying profits 13% in the past 12 months but fell into a loss at the statutory level due to PPI costs.
Banks
3,996.57
17:09 24/04/24
FTSE 250
19,719.37
17:09 24/04/24
FTSE 350
4,419.71
17:09 24/04/24
FTSE All-Share
4,374.06
16:44 24/04/24
Underlying profit before tax was £331m for the year ended 30 September, just before the group completed its acquisition of Virgin Money in October. Total income was just below flat at £1.01bn, with continued growth in net interest income more than offset by lower non-interest income.
Net interest margin, the difference between interest paid on savings and recouped on loans, declined 0.1 percentage points over the year to 2.17% driven by the competitive pricing environment in mortgages, balanced by a cost efficiency programme and low impairment charges. The cost-to-income ratio improved by four percentage points to 63%.
A statutory loss before tax of £164m was much worse than many analysts expected primarily due to the inclusion of £396m of legacy conduct costs, up from £220m at the half year stage. The majority, £352m, related to redress for historic PPI misselling, with an increase of £150m in the second half of the year, reflecting the "prudent" decision to revise up the estimate for ‘walk-in’ complaints that are expected before the August 2019 time bar.
The conduct provisions reduced the group's core equity tier 1 capital ratio by 182 basis points to 10.5% but a pro-forma capital ratio of 14.0% if including the 350 basis point uplift following the receipt of accreditation post the year end from the Prudential Regulation Authority under the internal ratings-based (IRB) approach. IRB accreditation for both its mortgage and SME/corporate portfolios means the group is now authorised to use its own internal risk models to determine credit risk weighted assets and has enabled a significant reduction in the RWAs held for the two portfolios. On a consolidated basis to include Virgin Money, the CET1 ratio rises to 15.2%, with IFRS3 fair value accounting adjustments still to be assessed and applied.
"It has been a landmark year for CYBG, continuing to deliver ahead of market growth and meeting our underlying financial targets in a highly competitive market, while also completing the transformational Virgin Money acquisition," said chief executive David Duffy.
"In a competitive market, we have delivered an increase in underlying profits, returns and capital generation - all of which means we are delighted to recommend an increase to last year's inaugural CYBG dividend, payable to all shareholders."
A dividend of 3.1p per share, payable to all shareholders, has been proposed, up from 1p a year ago.
"Clearly Brexit negotiations mean the external political and macro economic environment remains inherently uncertain," Duffy cautioned. "We have planned for a period of uncertainty, but it is impossible to ignore the lower levels of business confidence, especially for SMEs, while the final specific outcome of negotiations remains unclear."
"CYBG has a bright future with a unique combination of growth opportunities. We will participate strongly in the RBS alternative remedies schemes, have a stronger competitive edge as the first IRB accredited bank since the financial crisis, can fully leverage our iB platform in the new Open Banking landscape, and, of course, our combination with Virgin Money creates a genuine national competitor to the banking status quo."
The group provided guidance for the combined CYBG-Virgin business in the 2019 financial year, including a net interest margin of 160-170 basis points and underlying costs of less than £950m.
Shares in CYBG fell more than 10% to 223.4p, their lowest since May 2016.
Broker Shore Capital said the statutory profit performance and dividend were both worse than we expected, primarily due to the inclusion of £396m of legacy conduct costs.
NIM guidance was below its forecast of 175bps but costs were in line.