Former NAB unit CYBG warns of Brexit slowdown

Brexit is hurting but unlikely to be the end of the world, the CFO of NAB’s former UK subsidiary says.

CYBG houses brands including Clydesdale Bank, Yorkshire Bank and online arm B. Picture: Bloomberg

Britain’s CYBG, formerly part of National Australia Bank, believes consumer sentiment will continue to be hit by stalled Brexit negotiations, although the political situation is “unlikely to be armageddon”.

CYBG’s chief financial officer Ian Smith was speaking after the dual-listed bank delivered a messy interim earnings result, largely due to its acquisition of Virgin Money.

“Unless we can get a [Brexit] solution or some clarity people are going to keep their hands in their pockets. We are cautious about the economic environment,” he told The Australian.

Pro forma underlying profit before tax — which includes its Virgin Money purchase — slid 5 per cent to £286 million ($533.3m) for the six months ended March 31, on the same period a year earlier, as loan impairments rose. Pro forma before-tax profit, which took into account exceptional items including £214m in acquisition and integration costs, tumbled to £9m, while statutory net profit came in at £29m.

The group reiterated its guidance for an annual net interest margin of 1.65 per cent to 1.70 per cent as the first-half printed at 1.71 per cent against the backdrop of strong competition for mortgages. Underlying net interest income fell to £728m in the half, from £738m a year earlier.

CYBG, which houses brands including Clydesdale Bank, Yorkshire Bank and online arm B, cut underlying costs by 3 per cent and said the acquisition of Virgin Money had realised £33m of synergies after it rationalised the top two management layers. The bank is targeting £150m in cost synergies by the end of 2021.

Mr Smith said the bank would deliberately slow its mortgage growth in the second half as there were parts of the market that weren’t delivering “particularly attractive” returns.

The CYBG’s mortgage book grew 2.5 per cent to £60.5 billion in the first half from the prior six months and its small business and unsecured lending port­folios also increased.

In London the stock rallied 6.9 per cent in early trade but it remains almost 33 per cent lower than a year ago. Impairment losses on credit exposures came in at £77m and small business provisions edged up.

On continued remediation of regulatory issues, CYBG noted a conduct provision top up of £33m for increased processing costs from claims stemming from a payment protection insurance mis-selling scandal.

On legal action lodged by claims management group RGL over alleged miss-selling of tailored business loans, Mr Smith said: “We stand behind the way we’ve dealt with SMEs [small and medium enterprises].”

He said, despite talk of a second legal case being lodged by a customer remediation group, CYBG was not aware it was going to “manifest as an action”.

The profit result bettered expectations. Morgan Stanley analysts labelled it a “clean beat” on the revenue line and said the bank’s net interest margin guidance appeared achievable, despite a competitive mortgage market.

Shaw and Partners analyst Brett Le Mesurier was less upbeat, saying on an underlying and pro forma basis CYBG had “no income growth” from a year earlier and cost-cutting efforts weren’t worth crowing about.

“Underlying expenses declined over the year but, in view of the large acquisition and integration costs and the software write-off mentioned, such an achievement is not worthy of a congratulatory response,” Mr Le Mesurier said.

CYBG plans to update the market in June on a “refreshed strategy”.

NAB completed the demerger of CYBG in 2016 after giving up on its disastrous foray into UK banking.