CYBG, the owner of Yorkshire Bank, has suffered a half year loss after taking a hit from the payment protection insurance (PPI) scandal.
Leeds and Glasgow-based CYBG - which is in talks over a potential £1.6 billion takeover of Sir Richard Branson’s Virgin Money - was left nursing the loss after recently taking an extra £350 million charge for PPI mis-selling claims ahead of the complaints deadline.
CYBG’s underlying profit before tax rose by 28 per cent year-on-year to £158m; although it delivered a statutory loss after tax of £76m due to the PPI legacy costs.
In a statement to accompany its interim results, CYBG said it expects trading conditions to “remain challenging”, with slowing consumer spending and borrowing and a competitive mortgage market.
However, Ian Smith, the group chief financial officer, said the core business is in great shape and CYBG is focusing on growth opportunities.
The company said it is developing new digital capabilities for both retail and SME (small-and-medium-sized enterprise) customers. The group’s SME franchise is also well placed to be a beneficiary of the RBS alternative remedies package, CYBG said.
Mr Smith said an £18m increase in provisions for other legacy conduct charges related to historic issues, such as complaints related to interest rate hedging products.
Many of the major banks have been forced to set aside cash in connection with legacy conduct issues. Mr Smith said the banks have “had to take their medicine as a first step to rebuilding trust”.
They have also learned to be transparent and deal with complaints effectively, Mr Smith added.
Talking about the industry as a whole, Mr Smith said: “We’re heading in the right direction and many of the lessons have been learned.”
CYBG’s statement added: “Spending has slowed and businesses have been holding back investment, which has had some impact on demand, but with credit conditions remaining benign.
“In the mortgage market, the economic uncertainty has reduced customer demand, while competition has remained intense and this has resulted in a challenging pricing environment.”
Its net interest margin - a key measure for retail banks - slipped in the first half, highlighting the pressure on challenger banks such as CYBG and the rationale behind its proposed takeover of Virgin Money.
The deal, which was revealed earlier this month, would see Virgin Money shareholders own around 36.5 per cent of the new business.
It could mean a major payout for founder Sir Richard Branson, whose Virgin Group holds a controlling stake in the lender.
But it is by no means a done deal, according to banking analyst Gary Greenwood at Shore Capital, whose concerns include price and complications of combining IT systems.
He said: “We think it is by no means certain that CYBG will make its proposal formal when the deadline for making such an offer expires on June 4.
“Even then, we think it may need to sweeten its offer in order to get the recommendation of Virgin Money’s management, with a larger premium meaning that more of the benefits would accrue to Virgin Money’s shareholders.”
Half-year results showed CYBG grew gross mortgage lending by 6 per cent year-on-year in the first half, with overall customer lending growth rising to £32.7 billion from £32 billion a year ago.
CYBG chief executive David Duffy said the wider mortgage market was now “stabilising but at a competitive level”.
He added Britons were “being cautious ahead of some clarity” from the Brexit negotiations, with consumer spending slowing and business investment on pause.
But Mr Duffy remained tight-lipped on its plans for a formal bid for Virgin Money, ahead of its June 4 deadline to make a firm offer or walk away.
CYBG, owner of Clydesdale and Yorkshire Bank, made its London market debut in 2016 after it was spun off by National Australia Bank
Its bid for Virgin Money comes as Britain’s mid-sized banks fight the competitive squeeze from bigger rivals with more to spend on technology, and from nimbler digital-only banks with lower costs.
Mr Duffy commented: “In the first half of 2018, we have continued to make good progress in delivering our strategic priorities and developing CYBG as the leading alternative to the UK’s big banks.”