£150m PPI hit pushes CYBG to annual loss

Clydesdale Bank owner CYBG posted full year 2018 results to end September 2018 today showing the lender swung to a loss over the course of the last year on the back of a £150 million charge for PPI mis-selling claims.

The company reported a £164 million pre-tax loss for the year to 30 September, down from profit of £268m profit in 2017, while net income rose 1 per cent to £851 million.

The group was hit by £396 million in legacy conduct costs, most of which are linked to PPI, and while CYBG said weekly claims numbers have been falling since the end of July, the bank “considers it prudent” to increase provisions for PPI by £150 million.

The performance comes in a year that has seen CYBG acquire Virgin Money, making CYBG the UK’s sixth largest full-service bank.

The new combined group has market leading digital capabilities, a nationally recognised brand, six million customers and is the only challenger bank that serves both retail and SME at scale.

CYBG said it is proposing a dividend of 3.1p, up from 1p in 2017.

Chief executive David Duffy said: “Clearly Brexit negotiations mean the external political and macroeconomic environment remains inherently uncertain.

“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.”

Mr Duffy added: “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 in October 2018 following overwhelming shareholder support.

“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.”

Alasdair Ronald, senior investment manager at Brewin Dolphin Scotland, said: “While the obvious headline is CYBG’s £145 million loss – largely attributable to PPI provision and other legacy issues – this was a strong set of results for the bank. Underlying profit before tax was up 13 per cent year-on-year, underlying costs were down 6 per cent, and shareholders will benefit from an increased dividend of 3.1p per share. CYBG’s short-term prospects will inevitably be impacted by the uncertainties surrounding Brexit and the wider economic outlook, which disproportionately weigh on SME confidence; but the longer-term picture looks positive. The Virgin Money acquisition should give CYBG greater scale and with that comes the ability to reduce costs. The combination of an operationally-sound business with a strong brand should make the ‘new’ Virgin Money greater than the sum of its parts.”

CYBG Full Year Results Headlines:

· Underlying profit of £331m up 13 per cent.

· Customer deposit growth of 4.2 per cent to £28.9bn.

· Mortgage and SME lending growing ahead of market:

o mortgages up 4.5 per cent to £24.5bn

o core SME up 5.6 per cent to £7.2bn

· Continued to take costs out, reducing 6 per cent yoy to £635m.

· Strong capital position - 63bps of underlying capital generated in the year.

· Stable total operating income levels.

· NIM in line with guidance for the full year at 2.17 per cent.

· Additional provision of £352m for PPI legacy costs (net of conduct indemnity) and £44m for other legacy costs, gives a statutory loss of £145m. Weekly run-rate of walk-in PPI complaints down.

· IRB accreditation achieved – the first new accreditation since the financial crisis and a significant milestone for the bank.

· Pre-tax estimated annual run-rate synergies from Virgin Money acquisition of c.£120m by end 2021 – driven by operational efficiencies.

· Well positioned to benefit from the RBS alternative divestment scheme early next year; invested £16m in competing for the Williams & Glyn customers.