Why the share price of this ASX bank stock is likely to crash this morning

The CYBG PLC/IDR UNRESTR (ASX: CYB) share price will cop a beating this morning if its UK share price is any guide.

This is despite the fact that the British-based bank, better known as Clydesdale Bank, handed in a strong underlying profit result and a lift in its dividend last night.

But that couldn’t save the CYB share price from taking a 17% dive to 206.40 pence on the London Stock Exchange and the ASX-listed entity is likely to crash as well.

It doesn’t help that the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is set for a big fall this morning on poor offshore leads.

It’s not the earnings Fools

It isn’t so much the results that have spooked UK investors but management’s downbeat outlook due to Brexit which has poured cold water on the 13% jump in CYBG’s underlying net profit to £331 million ($587 million) and the three-fold increase in its dividend to 3.1 pence per share.

That compares favourably with any Aussie bank with the Westpac Banking Corp (ASX: WBC) share price, Australian and New Zealand Banking Group (ASX: ANZ) share price and the National Australia Bank Ltd. (ASX: NAB) share price staying under pressure after they handed in their results a few weeks ago.

CYBG said that even if a Brexit deal is successfully negotiated, trading conditions are likely to slow markedly in 2019 and 2020 as Brits aren’t buying property.

Business and consumer confidence are on the wane and that will weigh on CYBG’s growth.

A 10-basis point drop in the bank’s net interest margin (NIM) to 2.17% and a decline in its CET-1 ratio to 10.5% from 12.4% is also hurting sentiment.

Management is guiding for a NIM of 1.6% to 1.7% for FY19.

Not all bad news

But this doesn’t mean CYBG doesn’t have growth levers it can pull. Its takeover of Virgin Money in the UK could help the bank grow faster than the broader sector due to cost-cutting and greater cross-selling opportunities.

CYBG is aiming to cut £40 million in costs in the first year of the merger by merging back-office functions and will change its name to Virgin by the end of 2019 as the Virgin name is a much more recognised household name.

Further, the bank is coming to the tail-end of the payment protection insurance scandal as this is the last year that aggrieved customers can make a claim against the bank.

CYBG has set aside a further £150 million in provisions for this potential liability after it copped a £352 million hit to its bottom line in FY18 that pushed its bottom-line to a statutory net loss of £145 million compared to a £182 million profit in FY17.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, CYBG Plc, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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