CYBG's maiden profit fails to impress as tax charge hits

In its first annual results as an independent public company, CYBG, the holding company of Clydesdale and Yorkshire Banks, reported lower annual income than expected but managed to lift profits strongly higher.

As management push through an ongoing cost reduction programme across the group's sprawling operations and cary out a two year investment programme in improving its digital capabilities and efficiency, the FTSE 250 group delivered its first statutory profit in five years, while operating profit before impairments increased 9% to £260m on total income up 3% to £989m in the year to 30 September.

Adjusted pre-tax profits increased 39% to £221m as impairments fell 50% to £39m.

But a large tax charge relating to a change in accounting treatment of its £237m deferred tax assets resulted in a net loss after tax of £164m, which analysts calculated would reduce the level of tangible net asset value per share.

Key performance measures were all stable, most improving slightly: the core SME loan book grew just over 6% while the net interest margin improved to 2.26% from 2.23%, the cost income ratio dropped to 74% from 75%, while the return on total equity edged to 5.2% from 5.1%.

Chairman Jim Pettigrew said 2016 was a landmark year for the bank as it become independent for the first time since the 1920s after it was floated by recent parent company National Australia Bank in February.

"Our ambition is straightforward: to become the credible alternative to the big UK banks. We intend to achieve this
using our scalable infrastructure to support our growth ambitions, and our enhanced digital capability to
streamline process and deliver a superior customer experience," he said.

Chief executive David Duffy said the turnaround was being built on robust growth in mortgages, SME lending and deposits, supported by the ongoing cost reduction programme, with the £350m-plus investment programme partly to "unlock the potential" of the digital platform to drive improvements in customer experience and distribution capabilities.

"As the only true full service, challenger bank of scale, we are perfectly placed to disrupt the status quo in the UK."

Analysts at Shore Capital said as a result of the tax charge, tangible net asset value per share (TNAVPS) reduced by 9% to an estimated 285p, as it was not disclosed in the statement, well short of its expected 322p.

ShoreCap, which said it expects dividends will begin in 2017 at a relatively low pay-out ratio around 20% that should rising to circa 50% in 2018, said the decline in TNAVPS was likely to weigh on sentiment.

Broker Numis said while a cost-to-income ratio of 74% created opportunities for improvement, with management lifting end-2019 targets to a CIR ratio of 55%-58%, it expressed concern "about both the level of work that is required and the lack of success the previous parent NAB had in trying to do this.

"We therefore believe CYBG should trade at a sizeable discount to peers to reflect the challenges management will inevitably face in cleaning up such an old and sprawling business."

Shares in CYBG were down over 4% to 282p on Tuesday morning.