CYBG's lending and margins dip but confidence remains strong
CYBG has started its financial year by growing its mortgage book and continuing cost cutting, but investors were disappointed with a slight decline in business lending and net interest margins.
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The operator of the Clydesdale and Yorkshire Bank said it was on track to deliver full year financial targets but made no comment on its recent approach to acquire Williams & Glyn from Royal Bank of Scotland.
Net interest margin, the measure of the difference between lending and saving rates, was at 222 basis points in the period, down from the 226 NIM in the last year.
While NIM was moderately below guidance it is expected to improve thanks to the benefit of lower deposit pricing and drawdown on the Bank of England’s Term Funding Scheme (TFS).
In lending, the mortgage book increased to £22.1bn as of 31 December, up an impressive 4.4% over a year and from £21.8m at the end of September.
Lending to SMEs, however, saw the SME book reduced 2.5% after £574m of new loans and facilities were written in the quarter and unsecured personal loans declined 5.2%.
Although there were higher than expected redemptions by a small number of larger borrowers whose facilities were repaid, which management said was principally as a result of M&A activity or asset sales.
On the other side of the coin, deposit balances increased 4.7% since 30 September 2016, driven by strong performance in current accounts and savings balances.
Common equity tier-1 capital increased to 12.8% from 12.6% last year.
The cost cutting programme, a key element to CYBG's investment case, was tracking in line with management guidance for a full year reduction of 5% to between £690-700m as the bank reduces headcount.
Chief executive David Duffy said: "Whilst there is some uncertainty created by Brexit, economic indicators in the UK have proved resilient since the referendum vote. To date we have not seen any negative impact on asset quality, but we continue to monitor market conditions closely."
Shares in CYBG continued to fall over Tuesday and by mid afternoon were down more than 4% to 272.8p.
Broker Numis said that while management continued to guide to a broadly stable NIM, "we expect this will actually soften further in coming quarters due to slower growth in higher margin products and lower asset yields".
Numis, which has been carrying a 'sell' on the stock, has assumed the rate of impairments will effectively double to 24 basis points relative to the abnormally low levels recorded last year and the increased uncertainty surrounding Brexit; "but we note this could prove overly conservative" given the cost of risk in the first quarter was only 6bps on an annualised basis.
"We do not expect to make any material changes to our estimates, but note there could be some upside should impairments and NIM stay at current levels. Nevertheless, we remain concerned that a normalisation of impairments, rising competition and Brexit uncertainty will make it difficult for CYBG to achieve its 2019 target of 'double digit' RoTE."