Shares in regional UK bank Clydesdale and Yorkshire Bank (CYBG PLC CDI 1:1) (ASX: CYB) will be in focus today after the group revealed another quarter of cost cutting and solid operational performance for the quarter ending December 31 2016.
The bank's dual-listed scrip trades on the ASX as a legacy of its divestment by the National Australia Bank Ltd (ASX: NAB) in early 2016 after years of underperformance driven by regulatory fines, scandals, and compensation claims over misconduct.
In the wake of all this NAB's management unloaded much of the scrip in its problem plagued bank on its own retail shareholders in something of a hospital pass, although in fairness the chess depositary instruments have performed reasonably since their creation.
As a regional operator the Clydesdale and Yorkshire Bank suffers similar competitive problems to the likes of Bank of Queensland Limited (ASX: BOQ) in growing versus powerful rivals and being reliant on generally soft economic regions in terms of residential house price and per capita economic growth.
For the quarter the group said it grew its mortgage book a decent 4.4% to £22.1 biillion, with £574 million in new loans to generally small business borrowers.
Deposit balances were also up 4.7% on an annualised basis since September 2016, with the bank acknowledging that the Brexit-driven base rate cut of August 2016 affected its "asset yields".
This means the profits it can make on its loans came under pressure due to the lower base rate environment meaning customers in general would demand better lending rates, amidst a competitive environment.
Banks make profits by making more on what they lend than they pay on what they borrow, so generally the lower the base lending rate the harder it is for them to maintain healthy net interest (profit) margins on their lending activities recorded across their balance sheets.
That's why the expected uplift in base cash rates globally since the election of President Trump has supported bank stocks as higher rates generally give them more room for manouevre in increasing profit margins.
Better long-term opportunities than Clydesdale and Yorkshire Bank?
Banks also generally profit as more debt is taken on at higher rates and with this being a hallmark of President Trump's business career his reflation, debt, and deregulation agenda could be a bonanza for bank stocks focused more globally and on U.S. markets.
I would look to avoid regional U.K. banks like Clydesdale and Yorkshire therefore to focus on those with greater leverage to the changing macro environment and adaptability to capitalise on it. One business that comes to mind is Macquarie Group Ltd (ASX: MQG). I expect it will outperform the Clydesdale and Yorkshire Bank over the long term irrespective of the U.S. government, but given its improving outlook it looks a reasonable buy on current valuations.
