The ASX-listed shares of UK-based Clydesdale Bank (ASX: CYB) have soared around 10% to $5.25 this morning after the National Australia Bank Ltd (ASX: NAB) spin-off posted a decent earnings report for the six months ending March 31 2016.
The bank posted a profit of GBP 107 million for the period, which is more than double the prior corresponding period's GBP 48 million. This as the group enjoyed the benefits of a cost-cutting program, lower bad debts, and a growing loan book.
Relatively vanilla high-street banks like Clydesdale turn profits by making more on what they lend than they pay on what they borrow. They borrow short term on wholesale markets and lend long term to their retail and business customers with Clydesdale's net interest margin of 2.25% reflecting its profit margin over the period.
This is up 2 basis points on the prior corresponding period, which is a decent result amidst a competitive lending environment offset by the usual re-pricing of balance sheet liabilities over savings products and other deposits.
The Bank of England's cash rate being all but permanently stuck at 0.5% is also something of a double-edged sword as it encourages lending, but limits the scope for the margin gouging activities so beloved of vanilla banks like Clydesdale as rates have not moved in years. The lack of scope for a rate cut limits the opportunity to lift profits by borrowing cheaper short term, while the long-term rates it lends at to home and business loan borrowers remain fixed.
The stock is also enjoying an additional tailwind this morning after opinion polls in the UK overnight suggested the chances of a vote in favour of a Brexit on June 23 are increasingly slim. This is especially good news for all financials that have leverage to the UK, with money manager Henderson Group plc (ASX: HGG) also up 2.4% in trade today.
Holders of Clydesdale Bank shares could hang on in the hope of gaining some exposure to a recovery in the UK economy and the business does offer diversification for investors that have too much exposure to the Australian economy.
However, over the long term I expect Clydesdale Bank will continue to feel the competitive heat, as it struggles to shake off its legacy conduct issues and an old-fashioned reputation amidst the fast-changing consumer-focused financial services environment in which it mainly operates.
