CYBG interim profits increase less than forecast

Adjusted profit of £158m in the six months to end-March was a 28% increase on the same period last year but short of the average analyst forecast of £164m as total income only grew 1.2%. Net interest income increased 3% to £426m and non-interest income shrank 10.5% to £77m due to additional market costs incurred during the period on current account switching.

The group grew deposits 5% to £28.4bn with growth across all product categories, supported by increases in both retail and small businesses, and across current accounts, savings and term deposits. Lending also grew 5% to £32.7bn with above-system annualised mortgage growth of 6% and core SME annualised growth of 5%.

Net interest margin — banks' key measure of the difference between income earnt on loans and paid on savings — fell to 2.18% from 2.27% in the year to September and 2.26% in the first half of last year. This was slightly below consensus expectations of 2.20%, but management remained confident of hitting the full year target of 2.20%.

There were £220m of conduct redress charges in the period, of which £202m was from the recently announced £350m increase in provisions for PPI costs to cover the costs of compensation for former misselling. CYBG also increased provisions by £18m for other legacy conduct charges.

Underlying costs were cut 7%, meaning the underlying cost-to-income ratio improved by six percentage points to 64%. Directors' guidance for full year costs was upgraded by £10m to be less than £640m.

At the statutory level, CYBG generated a loss before tax of £95m included £220m of conduct redress charges and £33m of business restructuring costs.

The conduct provisions reduced the core tier 1 ratio by around 100 basis points to 11.3%, below management’s target range of 12-13% but still providing a sizeable buffer to regulatory capital requirements.

Looking ahead, chief executive David Duffy said: "While the economic outlook remains uncertain, CYBG is well positioned to continue executing our existing strategy and to capture future growth opportunities across both our Retail and SME businesses in the year ahead."

He pointed to the imminent launch of a new online account aggregator and other services to enhance customers' experience and said CYBG was also preparing to compete for the opportunities offered the package of remedies that RBS is being forced to provide by regulators to even out the SME market.

CYBG shares were down almost 5% to 307.2p in early trading on Tuesday, wiping out all the gains since the confirmation of its approach for challenger banking peer Virgin Money.

Broker Shore Capital said the interim results were "slightly below consensus at an adjusted pre-tax profit level but full year guidance for costs has been upgraded suggesting to us that there should not be a material change in full year forecasts".

The drop in CET1 below target is also "not a concern as we expect the group to move to the internal ratings-based mode for calculating mortgage risk weightings before the end of the year, thus freeing up significant amounts of capital (we estimate £600m-£650m)".