Talk about a run on the bank! It's an ugly day for CYBG PLC/IDR UNRESTR (ASX: CYB) shareholders as the stock crashed to a record low in morning trade following a dismal update from management.
The CYB share price tanked nearly 20% to a low of $2 a share at the time of writing and that stands in contrast to other bank stocks, which are outperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: ASX NAB) share price are each rallying between 0.7% and 0.8%.
No insurance for collapse in confidence
CYBG is going rapidly in reverse after it announced that it had under provisioned for its PPI liabilities by a country mile!
It's not only a big blow to the UK bank's bottom line but to management's credibility. The stock had hit several lows over the past few weeks when management stayed mum – till today's shocker.
PPI are insurance that UK banks fraudulently sold to consumers. They are now forced to pay back aggrieved customers, who can file a claim before August 29.
CYBG had initially set aside £100 million to settle these claims based on level of claims being lodged before the end of June, but there had been a predictable rush of claimants coming out of the woodwork ahead of the deadline – so much so that the bank is lifting its provision to between £300 million and £450 million.
De-rating worst than it needed to be
The bank, which spun out of NAB, said it received an "unprecedented volume of PPI Information Requests" in August and that "received more than eight months' worth of Information Requests in one month with c.340k in aggregate over five weeks, of which c.120k of these were received in the final three days".
Management implied that it couldn't predict this and had issued a quarterly update in July that flagged an increase in such requests.
But CYBG could have clearly better prepared the market for today's news and the stock is likely to stay in the sin bin for longer than it needed to have been if its chief executive David Duffy did a better job of managing the situation.
Could there be a further blowout in PPI liability?
What's worse is that CYBG doesn't know what the true cost of its PPI liability will be until November when it processes all the outstanding claims.
The new increase provision it made is based on the historical success rate of claims it had processed before.
That won't give shareholders much comfort, especially when management's credibility is shot.
This is a real pity. If not for the PPI fiasco (and that could be an understatement), CYBG has a good outlook in my view as the bank beds down its merger with Virgin Money to become a credible challenger to the big UK banks.
