The compensation payments that banks have had to make for payment protection insurance mis-selling have proven far bigger than initially thought. When Lloyds Banking Group first set aside £3.2 billion to settle PPI compensation costs in 2011, it stunned the banking industry, which believed the figure was an absurd overreaction. As it turned out, Lloyds was £15 billion short and counting.
Yesterday CYBG was the latest bank to warn that it faces more PPI costs. The owner of Clydesdale and Yorkshire banks was spun out of National Australia Bank two years ago and is now a member of the FTSE 250. There are more than 70 Clydesdale branches and 90 Yorkshire branches in Britain.
When CYBG was spun off, its Australian parent company left an £1.1 billion indemnity to cover the costs of PPI and other scandals. CYBG has used that up and is setting aside a further £350 million. While the first £148 million of the new charge was covered by NAB under the terms of its indemnity, the remaining £202 million comes from CYBG. That caused disquiet in the market, which marked down the shares.
CYBG is an unloved child of the so-called challenger bank sector. Last year it made a statutory profit of £182 million, the first in five years. However, it has a market capitalisation of just under £2.6 billion. Metro Bank, which is about a third its size and made a profit of just £18.7 million in 2017, is valued at a little over £3 billion.
Wednesday’s PPI hit will do nothing to redress the balance. Based on the fresh £202 million cost to its bottom line, CYBG is looking at about a 100 basis point reduction in its core capital, taking its loss buffer below the bank’s target level of 12 per cent to 13 per cent.
Analysts at Investec pointed out that CYBG’s core equity capital was now forecast to be the worst in its sector, an unenviable attribute for any bank when maintaining a strong buffer is one of the main indicators that investors look for in a lender.
While many big banks around the world are paying dividends again after the financial crisis and various scandals, CYBG’s relatively pitiful payouts (its dividend yield in 2017 was 0.3 per cent and is forecast to be 0.5 per cent this year) hardly justifies investors moving away from the large high street lenders. Even among its peers, CYBG’s shareholder returns look poor. Virgin Money’s return on equity is twice that of CYBG and its dividend yield is 2.3 per cent.
One of CYBG’s biggest problems is something it cannot easily change and that is the geographic spread of its business. Scotland and the north of England are among the least attractive areas in terms of banking customers. This is not to say there is not money to be made here, but explains why a smaller lender like Metro, which built its business in the southeast, can justify a much higher multiple given its more wealthy and lucrative potential customer base.
There is also a technical issue holding back the bank’s valuation. CYBG is in the process of trying to transfer to so-called internal ratings-based models, which will reduce the capital it must maintain against its loan portfolios, important for a bank with a hefty skew towards mortgage lending. The bank has guided that it expects to gain IRB accreditation within the next six months, meaning its earnings capacity might be about to get a boost. However, some in the City are gloomy on the prospects of a meaningful increase in shareholder returns even if this is achieved.
For now, CYBG looks very much like a work in progress, even given its relative cheapness to its rivals. With more attractive returns on offer at far better franchises, this is one to swerve for the time being.
ADVICE Sell
WHY Anaemic returns and a relatively poor franchise mean this is a bank best avoided
Moneysupermarket.com
If Moneysupermarket.com was listed on its own price comparison website, it would be little surprise if it told customers that they could switch to a better deal. The group has kept a lid on its investors’ expectations since February, when it said that profits would be flat this year while it reinvented itself as a more customer-friendly business.
Mark Lewis, chief executive, pledged then to spend £5 million recruiting product engineers to come up with more comparison services and up to £9 million expanding its site in Manchester. As he reported disappointing annual growth for last year, which was running at almost half the rate of the broader market, Mr Lewis signalled that the business needed to buck up its ideas.
Barely a month later, Mr Lewis said that he would spend £40 million buying Decision Technologies, a specialist in comparing broadband and mobile deals. It was a sign of intent, and it needed to be.
The market for price comparison websites is fiercely competitive, even if Moneysupermarket offers more services than its rivals. It was founded in 1993 and now has three divisions: insurance, from household, car and travel cover; money, which offers bank account switching, cards, loans and Isas; and home services, predominantly energy deals for gas and electricity, but also broadband. It also owns Moneysavingexpert. Its main listed rival is Gocompare, while its big privately owned competitor is Comparethemarket.
Moneysupermarket’s first-quarter trading update yesterday showed that the group remains a work in progress and the reaction in the shares, up 14¼p to 297¾p, suggests that the market thinks it’s getting there.
Home services revenues were strong, up 15 per cent at £11.5 million largely on the back of energy deals, while a 4 per cent growth in insurance revenues to £47.1 million was respectable. Money, down 1 per cent to £23.1 million, was disappointing, though this was due in part to a lack of obviously attractive bank deals to tempt customers.
The shares have lost almost 10 per cent of their value since February and are about 21 per cent below a peak reached almost three years ago. They’re not cheap and there needs to more proof of progress.
Moneysupermarket.com’s advert featuring Gary the Bodyguard made the UK's Top 10 most complained about ads of 2016. Now investors have something to complain about
ADVICE Hold
WHY Too much can go wrong in a fast-moving market
