Australia's best performing bank stock in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is the one you probably forgot about, but its latest quarterly update shows it is also getting squeezed although its results will make the Big Four banks green with envy.
I am referring to UK mortgage lender CYBG PLC/IDR UNRESTR (ASX: CYB), or better known as Clydesdale Bank plc, which was spun out of National Australia Bank Ltd. (ASX: NAB).
Shares in Clydesdale tumbled 1.8% to $5.60 after the bank reported a drop in net interest margin (NIM) to 216 basis points in the December quarter compared to 221 basis points in the previous quarter.
The growth in deposits that is eclipsing the growth in lending is the key reason for the margin pressure, although competitive pressure in the UK mortgage market is not helping either.
Deposits grew by 14.8% in the quarter while mortgages increased by 7.4%. Mortgage growth is also expected to ease over the remainder of FY18 but management believes it will still grow by mid-single digits.
On the upside, the bank believes it is still on track to deliver a NIM of 220 basis points for FY18 and has reaffirmed its other targets for the year.
Clydesdale's NIM is still comfortably ahead of our leading domestic institutions with Commonwealth Bank of Australia's (ASX: CBA) NIM at around 211 basis points and Westpac Banking Corp's (ASX: WBC) NIM that is closer to 200 basis points.
Mid-single digit gains for Clydesdale's mortgage book would also be a good outcome given that our Big Four need to run to be standing still.
Despite today's fall, the stock is still up by around 20% over the past six months, leaving all other large cap banks in the dust. Commonwealth Bank, Westpac, National Australia Bank and Australia and New Zealand Banking Group (ASX: ANZ) are all trading in the red.
The only other listed back to be trading in the black is Bank of Queensland Limited (ASX: BOQ), which is up by around 3% over the same period.
I believe the dip in Clydesdale's share price is a buying opportunity as the bank's superior growth profile and strong balance sheet with a CET-1 ratio that rivals the Big Banks will keep the stock running ahead of the sector this year.
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