The share price of CYBG PLC/IDR UNRESTR (ASX: CYB) will be tested this morning even as the UK bank reported a big jump in half year earnings after the market closed yesterday.
The dual-listed CYBG, more popularly called Clydesdale Bank, crashed over 5% on the London Stock Exchange overnight and you can blame Brexit and bank bad behaviour for the souring in sentiment towards the outperforming stock.
Shares in CYBG have been outpacing the market and the sector by a country mile. The stock is nearly 17% in the black over the past year when the share prices of the big four Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have crashed between 6% and 14%.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up around 4% over the same period and I don't think the trend is about to change anytime soon.
Coming back to CYBG, the bank reported a statutory loss of £76 million ($42 million) but a 28% jump in underlying pre-tax profit to £158 million as total revenue inched up 1% to £503 million.
The statutory loss was driven by an increase in compensation claims from the UK's insurance scandal where customers were inappropriately sold payment protection insurance (PPI).
The increase in claims came primarily from "agents" making claims on behalf of affected customers and taking a slice of the compensation as fees. But changes in UK laws limiting the fees and the ability for agents to cold call customers is expected to prevent another blowout in compensation claims.
Management is also blaming the uncertainty caused by Brexit for dragging on its financial performance. This overhang as the UK tries to remove itself from the European Union without losing its trade privileges has caused that economy to underperform its European neighbours.
But these issues are well flagged to the market and I believe the sell-off has more to do with shareholders looking for an excuse to lock in some of the stellar profits they've accrued even though the outlook for the bank is reasonably bright – particularly if you compare these headwinds with those Australian banks are facing.
For one, CYBG's cost cutting program is running ahead of schedule and management is forecasting a 2-basis point uptick in net interest margin to 2.2% for the full year.
There's also room for the challenger bank to grow through acquisitions to increase its Small to Medium Enterprise (SME) customer base.
It's proposed merger with Virgin Money Holdings (UK) PLC is one such example that will not only expand its customer base but also improve its online/digital offering.
CYBG is the only bank stock I am overweight on. While I acknowledge valuation is looking a little stretched, this doesn't factor in any upside from acquisitions.
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