After the market closed yesterday Clydesdale and Yorkshire Bank, or CYBG PLC CDI 1:1 (ASX: CYB) released its third quarter trading update to the market.
Many investors had no doubt worried that the spun-off UK banking arm of National Australia Bank Ltd. (ASX: NAB) would be a casualty of the recent Brexit vote, but surprisingly it was largely unaffected and maintained its previous full year guidance.
A few highlights from the results are:
- £1.5 billion new SME loans and facilities in 9 months to 30 June, up 4% on prior period.
- Mortgage book £21.7 billion at 30 June, annualised growth of 8% vs 30 September.
- Successful launch of the "B" digital banking platform on 3 May.
- Continued growth in core deposits.
- Strong net interest margin at 227bps.
- Cost management firmly on track to meet full year guidance of £730 million.
- Continued capital strength – CET1 increased to 13.5% at 30 June.
Although this was a fairly good result considering the Brexit vote, I do have concerns over the slowdown in its SME lending and mortgage book. In its half year results SME lending had grown by 10% over the prior period, but has now dropped to 4%. Similarly it reported 9.8% annualised growth in mortgages in its half year results, but this has now slowed to 8%.
There are a number of positives in the results though. The bank grew its net interest margin to a strong 227bps in the quarter, kept its cost management on track, and improved the all important Common Equity Tier 1 capital ratio to 13.5%.
I believe the launch of its digital banking platform "B" is very promising. Management has advised that it has been received well by customers and has seen high levels of engagement on social media. This has broadened the bank's reach to different demographics and geographies.
Although it acknowledged that there is a lot of uncertainty regarding where interest rates are going in the United Kingdom, management has maintained its FY 2016 guidance of a flat net interest margin, a loan to deposit ratio of 115%, and CET1 to be in the range of 11% to 13%.
So should you invest in Clydesdale and Yorkshire Bank? Whilst I'm not personally a huge fan of the bank and believe Westpac Banking Corp (ASX: WBC) would be a better option, its shares are down 20% since the Brexit vote and could be reasonably good value as a result.
But it may take many months to fully understand any potential long-term damage the Brexit has had on the UK-based banks, its economy, and of course the British pound. So I would approach this one with caution for now.
