The ASX banking sector has been gaining ground ahead of the August reporting season but there will be one in the midst that is about to crash.
This is the CYBG PLC/IDR UNRESTR (ASX: CYB) share price as its London-listed shares dived 9.6% last night after the UK challenger bank posted its quarterly update, which management described as being "in line" with its expectations.
But a warning that it couldn't quite put a number on the final costs from Payment Protection Insurance (PPI) claims due to a late rush of aggrieved customers looking to lodge compensation claims for the mis-selling of the product before the August 29 deadline could have rattled investors.
Watch out for the bank run
The PPI scandal isn't specific to CYBG and is an industry wide issue. The uncertainty over this liability that could cost shareholders dearly comes at a time when the UK is under a hard Brexit cloud with its newly installed Prime Minister Boris Johnson making combative threats to rip the country out of the EU even if meant an economic meltdown.
Coming back to CYBF, it also didn't help that the bank reported a further 0.2% shrinkage in its mortgage book in the third quarter because of higher redemptions and lower new businesses lines.
CYBG, which is in the midst of changing its name to Virgin after it's merger with Virgin Money, explained that this was planned as its part of the Group's "optimisation strategy".
If that wasn't enough to spook investors, the much-watched net interest margin (NIM) dipped 3 basis points in the June quarter to 168 basis points (bps) and management expects FY19 NIM to come in at the lower end of its 165 bps to 170 bps range.
NIM is the difference between how much banks can charge customers for loans and how much banks pay for funds. Aussie banks have also been under a squeeze although their NIMs seem to have stabilised.
CYBG's margin pressure could also have stemmed from the increase in customer deposits (which is typically a more expensive source of funds than wholesale funding). The 1.8% increase over the previous quarter is likely due to the Virgin Money merger.
Foolish takeaway
The silver lining (and it's a pretty thin one) was that personal and business loans edged up over the quarter, particularly for personal lending, although mortgages still make up 83% of total lending.
The bank's capital buffer also increased slightly in the period with its common equity tier-1 (CET1) ratio coming in at 14.6%.
CYBG will be shunned by investors for the next month or so as investors are likely to prefer banking on the Commonwealth Bank of Australia (ASX: CBA) share price ahead of its full year results.
The CBA is the only big four bank to have a 30 June financial year end, although National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) will release updates in August.
