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LONDON (Alliance News) - CYBG PLC on Tuesday swung to an annual loss on sharply higher payment protection insurance costs, as the lender continues to handle the "inherently uncertain" Brexit negotiations.
Shares in the Glasgow-headquartered lender were trading 10% lower at 222.60 pence each, the worst performer in the FTSE 250 index of London mid-cap stocks.
The lender, which operates the Clydesdale Bank and Yorkshire Bank brands and recently bought rival Virgin Money, recorded a pretax loss of GBP164 million for the year ended September 30, compared with pretax profit of GBP268 million the year prior.
Net interest income stood at GBP851 million for the financial year, up from GBP844 million the year before.
The swing to pretax loss was primarily attributed to GBP396 million in legacy conduct charges, up sharply from GBP58 million in the year ago period. PPI provision during 2018 financial year totalled GBP352 million, with GBP44 million for other legacy conduct issues.
For the year, CYBG's return on tangible equity was was negative 6.9% compared to positive 6.1% the year before.
"While the additional PPI provision charge required in 2018 is disappointing, the group's strong capital position means we have been able to absorb this without any impact on our strategy and future ambitions," Chief Executive David Duffy said.
The lender has decided to make an additional GBP150 million in provisions for PPI to cover costs associated with a revised estimate of 83,000 future walk-in complaints.
As an added consequence of the increased legacy conduct costs, the lender's CET1 ratio for the year reduced to 10.5% from 12.4%.
CYBG, however, received Internal Ratings-Based accreditation in October - which is method of calculating credit risk capital requirements using internal, rather than supervisory, estimates of risk - pushing its pro-forma CET1 ratio at September 30 to 14.0%.
CYBG's net interest margin for the year dropped to 2.17% from 2.27%. The decline in margin was blamed on shift in mortgage mix towards lower-yielding owner-occupied lending.
The "continuation of competitive mortgage pricing" seen in the last couple of years also pushed the lender's margins down.
Net interest margin for 2019 financial year is predicted to be between 1.6% and 1.7%, having been rebased following the combination with Virgin Money.
The lender also said it continues to see strong competition for mortgages and deposits in the year ahead, which will put pressure on margins.
CYBG increased its gross loans and advances to customers in the 2018 financial year by 4.1% to GBP33.28 billion from GBP31.97 billion the year before, with mortgage lending increasing to GBP24.54 billion from GBP23.48 billion.
The lender's total customer deposits increased 4.2% to GBP28.85 billion from GBP27.68 billion, with current accounts rising to GBP14.22 billion from GBP13.80 billion.
Duffy added: "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."
The bank lifted its final and total dividend for 2018 financial year to 3.1p per share from 1p paid a year ago. CYBG's underlying pretax profit increased 13% to GBP331 million.
CYBG offered a subdued short-term outlook for its key markets - UK homeowners and small and medium sized businesses.
The subdued short-term outlook was attributed to a continued decline in the UK household savings ratio and Brexit uncertainty. The lender said that it is well prepared for an orderly Brexit and has made contingency plans for alternative scenarios.
"Clearly Brexit negotiations mean the external political and macro economic 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," Duffy said.
