The ASX-listed scrip in UK-based Clydesdale & Yorkshire Bank (CYBG PLC CDI 1:1) (ASX: CYB) tumbled 4.6% to $4.78 this morning after the group posted weaker-than-expected results for the half-year period ended March 31 2017.
Below is a summary of the result with comparisons to relevant prior corresponding periods.
- Underlying profit of £123 million, up 15%
- Statutory profit before tax of £46 million
- Total income of £497 million, up 1.2%
- Total underlying costs of £348 million, 1.4% lower
- Underlying earnings per share of 9 pence, up 25%
- Net interest margin (NIM) of 2.26%
- Underlying return on tangible equity of 6.3%
- Benchmark capital adequacy (CET1) ratio of 12.5%
The group maintained its full year guidance across key operating metrics and re-stated its intention to pay a "modest" dividend for the full year ending September 30 2017.
The market's disappointment over the result is related to the fact that statutory profit before tax came in at £46 million, which is well down on the £58 million posted in the prior corresponding half. Ballooning restructuring costs of £53 million were largely responsible for the statutory profit fall and a reflection of the fact that this is a bank still operating under a dark historical cloud.
The bank's net interest margin of 2.26% remained glass flat on the prior corresponding period in a reflection of the UK's still moribund economy, with the virtual zero interest rate (ZIRP) policy still in effect some 8 years after the GFC.
A lack of volatility in base lending rates (they can barely go lower) means it is tough for banks to shift their deposit or LIBOR funding mixes sufficiently to profit from lending rates that barely budge in a competitive market.
However, mortgage and small business lending all delivered some decent volume growth, with unsecured personal lending (mainly credit cards and overdrafts) falling as a reflection of a "disciplined" approach in a "competitive rate environment".
Should you buy?
The Clydesdale and Yorkshire Bank is far cheaper than its big Australian peers such as Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC) on a number of common valuation metrics, such as price-to-book value or trailing multiples of earnings.
However, it is cheaper for a reason, as it is a small fish in a big UK banking pond full of larger rivals and its "regional" status means it is feeding off weaker parts of the economy.
Clydesdale's return on equity (a key measure of bank profitability) of just 6.3% is also around half of that its Australian rivals, despite it enjoying a favourable net interest margin to all of them. This demonstrates how the bank is of a lower quality than its Australian rivals due to greater competition, legacy issues, higher costs, and its tougher operating environment.
I don't see why an Australian investor would buy shares in Clydesdale & Yorkshire Bank when they have some of the most dominant and profitable banks in the world to invest in on their own doorstep.
