CYBG PLC (ASX:CYB)

David Duffy
CEO
Market Cap (AUD): 2.07B
Sector: Financials
Last Trade (AUD): 2.26 -0.02 (-0.88%)
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1. About

CYBG PLC is a proud, independent banking group with over 175 years of heritage through its Clydesdale Bank, Yorkshire Bank, Virgin Money, and B brands. It operates through SME Banking and Retail Banking segments.

The Company was founded in 1838 and is based in Leeds, the United Kingdom.  It also provides international trade services, such as import loans, export loans, documentary collections, currency guarantees, and letters of credit for securing trade; and current account facilities comprising debit cards, cheque books, regular statements, direct debits, and standing orders, as well as day to day and online banking services. The Company has a strong personal customer base and a business banking capability through a UK-wide network.

2. Business model

 

The Company operates as a single division:[1]

 

Division

Revenue (£M)

% of Total Revenue

% of Profit (before Int, Tax, Depn & Amort)

Profit drivers[2]

SME Banking

£337

33.5%

157.9%

  • 2018 has seen continued momentum in its SME lending business, with a strong pipeline and drawdowns of £2.0bn
  • Its core SME lending portfolio therefore increased by c.£400m to £7.2bn, up 5.6%, and ahead of system growth of 2.1%
  • This is due to a consistent and disciplined focus on serving the SME market, with its specialist sector offerings resonating particularly strongly with customers

Retail Banking

£740

73.5%

378.0%

  • The mortgage book increased by 4.5% in the year to £24.5bn, compared with market growth of 2.5%
  • The Company advanced £5.2bn of mortgages in 2018 with c.80% of this coming through its broker network with its proprietary mortgage business delivering c.20%
  • To support its sustainable growth in lending, deposits grew by £1.2bn (4.2%) year on year with notable increases in:
  1. total B current account and linked savings, which grew by 96% to £2.1bn during the year; and
  2. business notice and access accounts, which increased to £1.9bn at year end, a 6% increase year on year
  • Unsecured lending growth continued, with an increase of 3.5% to £1.2bn

Central Functions

(£70)

(7.0%)

(334.1%)

N/A

Other

N/A

0.0%

(301.8%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Underpinned by its three strategic priorities -

  

  • Drive sustainable customer growth

By investing to broaden the franchise across its target segments and core regions, while enhancing the customer experience.

 

  • Improve efficiency

By making its network, operations and organisation more efficient and agile for colleagues and customers.

 

  • Capital optimisation

By securing internal ratings-based (IRB) accreditation across all of its lending book (with accreditation for mortgages and small and medium sized enterprises (SMEs) lending achieved in October 2018) and deploying its capital to support its business ambitions while balancing risk and reward.

The Group’s strategy is to create a culture of inclusion for everyone that works in the long-term interests of customers, colleagues, and shareholders, as well as society as a whole.

4. Markets

 

The Company operates in markets including:[4]

 

Industry (UK)

Industry Revenue (2018)

Growth Rate (Annual 13-18)

Banking

£126.3 billion

4.8%

5. Competition

 

Major competitors include:[5]

 

  • CIMB Thai Bank PCL (BKK:CIMBT)
  • Citystate Savings Bank Inc.
  • Commercial Bank of Ceylon PLC Non-Vtg

6. History

 

1838[6]  

Clydesdale Bank founded in Glasgow, Scotland

 

1859  

Yorkshire Bank founded in Halifax, West Yorkshire, England

 

1877  

Clydesdale Bank established London presence

 

1911  

Yorkshire Bank incorporated as The Yorkshire Penny Bank Limited

 

1920  

Midland Bank bought Clydesdale Bank

 

1987  

National Australia Bank (NAB) acquired Clydesdale Bank

 

1990  

NAB acquired Yorkshire Bank

 

2001  

Clydesdale Bank and Yorkshire Bank’s banking licences were merged pursuant to the National Australia Group Europe Act 2001, a UK Private Act of Parliament

 

2012  

Strategic review to simplify business and operating model conducted; commercial real estate (“CRE”) book transferred to NAB – Business restructured and positioned to capitalise on its strengths and focus on retail operations and SME business lending across core regions

 

2013  

“The Company care about here” rebranding campaign and launch of mobile banking – The brand re-launch reinforced CYBG Group’s commitment to customer service

 

2014  

New concept branches, new service proposition and increased digital functionalities introduced

 

2015  

First polymer banknotes in Great Britain issued by Clydesdale Bank

CYBG Group demerger announced

 

2018  

CYBG acquisition of Virgin Money

7. Team

 

Board of Directors[7]

 

Jim Pettigrew – Chairman

David Bennett – Deputy Chairman and Senior Independent Non-Executive Director

Clive Adamson – Independent Non-Executive Director

Paul Coby – Independent Non-Executive Director

David Duffy – Executive Director and Chief Executive Officer

Geeta Gopalan – Independent Non-Executive Director

Adrian Grace – Independent Non-Executive Director

Fiona MacLeod – Independent Non-Executive Director

Darren Pope – Independent Non-Executive Directors

Dr. Teresa Robson-Capps – Independent Non-Executive Director

Ian Smith – Executive Director and Group Chief Financial Officer

Amy Stirling – Non-Executive Director

Tim Wade – Independent Non-Executive Director

Fraser Ingram – Interim Group Chief Operating Officer ( With effect from 19 November 2018)[8]

 

Management Team

 

David Duffy – Chief Executive Officer

Debbie Crosbie – Group Chief Operating Officer

Ian Smith – Group Chief Financial Officer

Kate Guthrie – Group Human Resources Director

Fergus Murphy – Group Customer Value Director

Gavin Opperman – Group Customer Banking Director

Helen Page – Group Innovation and Marketing Director

James Peirson – Group General Counsel

Mark Thundercliffe – Group Chief Risk Officer

Enda Johnson – Group Corporate Development Director

Peter Bole – Integration Director

Hugh Chater – Chair, Executive Committee of Virgin Money


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8. Financials

 

2018 Half Year Results Presentation

 

Financial Year 2017/18 (ended 30 September)[9]

 

Division

Revenue (£M)

% Change

Profit (before Int, Tax, Depn & Amort) (£M)

% Change

SME Banking

£337

0.9%

£259

7.9%

Retail Banking

£740

(0.5%)

£620

(1.9%)

Central Functions

(£70)

(12.9%)

(£548)

5.4%

Other

N/A

(100.0%)

(£495)

(1880.0%)

Total

£1,007

(2.8%)

(£164)

(161.2%)

9. Risk

 

Major risks include:[10]

 

Principal risks

Credit Risk

Credit risk is the risk of loss of principal or interest stemming from a borrower’s failure to meet contracted obligations to the Group in accordance with the terms agreed. Credit risk is evident at both a portfolio and transactional level.

 

Balance Sheet & Prudential Regulation Risks

Balance sheet and prudential regulation risk covers a number of categories of risk, which affect the manner in which the Group can support its customers in a safe and sound manner. The risks include the need to withstand times of stress for the loss of funding (liquidity), the impact of restricted access to future sources of deposits (funding), the impact of providing a defined benefit (DB) scheme to colleagues (pension) and the need to withstand severe unexpected losses (capital).

 

Regulatory and Compliance Risk

Regulatory and compliance risk is the risk of failing to identify, understand, monitor and comply with relevant laws, regulations, licence conditions, supervisory requirements, self-regulatory industry codes of conduct and voluntary initiatives. In doing so, the Group risks damaging its relationship with its regulators. It is also the failure of not keeping regulators informed of relevant issues and not responding effectively to information requests and regulatory reviews.

 

Conduct Risk

Conduct risk is the risk of undertaking business in a way which is contrary to the interests of our customers, resulting in the delivery of inappropriate customer outcomes, customer detriment, regulatory censure, redress costs and/ or reputational damage

 

Operational Risk

Operational risk (including resilience and information security) is the risk of loss resulting from inadequate or failed internal processes and systems or from external events. It includes legal risk and operational risks associated with the execution of strategy.

 

Financial Crime Risk

Financial crime risk is the risk that the Group’s products and services will be used to facilitate financial crime against the Group, its customers or third parties.

 

Strategic, Business and Financial Performance Risk

Strategic, business and financial performance risk is the risk of significant loss, loss of earnings and/or damage arising from business decisions that impact the long-term interests of stakeholders or from an inability to adapt to external developments.

 

People Risk

People risk is the risk of not having sufficiently skilled and motivated colleagues who are clear on their responsibilities and accountabilities and who behave in an ethical way.

 

Emerging risks

The Group monitors the environment in which it operates to identify emerging risks that may have an impact on its operations and strategy. The Group currently considers its top emerging risks to be:

Geopolitical and macroeconomic environment

The Group is exposed to a variety of downstream risks resulting from the geopolitical environment, which have significant business relevance. With a predominantly UK-based customer profile, the Group continues to monitor credit portfolios closely. Regular assessments of strategic plans, risk appetite, and risk sensitivity analysis are undertaken to minimise and negate potential impacts.

 

The UK vote to leave the EU (Brexit)

There is ongoing monitoring of the UK’s withdrawal from the EU, with negotiations creating significant economic uncertainty and a potential negative impact for the UK macroeconomy. The Group continues to consider all potential consequences for its customers, products and operating model with mitigating actions in place as appropriate. The uncertainty and related pace of change is being monitored closely and the Group will react appropriately having given consideration to both potential and actual outcomes, customer and other stakeholder implications.

 

Competition

The financial services industry is a highly competitive environment. The emergence of new entrants and regulatory initiatives, such as Open Banking, may lead to material changes in the future provision of financial services. The Group recognises both the risks and opportunities resulting from the changes and continues to develop strategies, products, and technologies to ensure it can take strategic advantage where possible and mitigate any corresponding risks.

 

Consumer credit

The Group maintains an awareness of the risk of significant credit losses occurring within a short time period which would have a detrimental impact on earnings and profitability. Credit risk strategies, appetite and tolerance levels are reviewed and approved by the Board and regular monitoring of the credit portfolio, including risk sensitivity analysis and reviews of asset quality metrics, is undertaken to ensure early identification and mitigation of potential risks. Unsecured consumer lending is an area of considerable regulatory focus and one where the Group is particularly alert to the potential regulatory, economic and customer impacts. New strategies have been delivered in response to revised regulatory requirements and reviews are underway to address further, future change

 

Cybersecurity and IT

With increasing levels of attempted cyber attacks across the industry, the Group remains vigilant and acknowledges the potential risks of such attacks including; service interruption, data loss, customer and financial detriment and reputational damage. The Group continues to enhance and invest in the control environment, recognising the changing cyber landscape, and the increased focus on digital capabilities, as well as the changing risk profile of the business.

 

Financial crime (including cybercrime)

The Group, in conjunction with the wider industry, continues to be subject to increasing fraud attacks. In response, the Group continues to enhance its fraud defences with a particular focus on behavioural analysis tools. The management of financial crime remains a key area of regulatory focus and the Group continues to enhance its framework for monitoring, management, and mitigation of financial crime.

 

Regulatory change

The Group, in common with the financial services industry as a whole, continues to face a significant agenda of regulatory and legislative change, including those pertaining to taxes. The Group continues to monitor the emerging requirements and ensure it is well placed to respond with effective regulatory change management. The Basel Committee published their final Basel III framework in December 2017. A key objective of the revisions is to reduce excessive variability of RWAs and improve the comparability of banks’ capital ratios. Implementation dates range from 2022 to 2027 and the Committee has introduced transitional arrangements to ensure an orderly and timely implementation. The Group will be advised of its final MREL requirements by 2020 and the outcome may result in additional costs to those that have already been incorporated into the Group’s Strategic Plan.

 

Integrating Virgin Money

The risks associated with the acquisition of Virgin Money have been described in detail in the prospectus to the transaction. The acquisition represents a significant programme of change requiring prudent management in order to deliver the benefits from the transaction. There is a risk that issues arise during integration that may lead to additional costs or a delay in the realisation of benefits. The integration programme places customers’ interests at the centre of all aspects of change.

 

Customer detriment

The Group acknowledges the continued risk of historic customer detriment and the risk of issues not being accurately identified at an early stage due to failures to adhere to, or maintain, a robust control framework, leading to potential customer treatment or fairness issues. The Group ensures that the underlying framework is robust and continues to work closely with its Regulators.

 

Service interruption and operational resilience

There is a reputational risk and/or adverse impact on customer confidence which may result from service interruption to critical operational services. The Group continues to strengthen resilience in its platforms and make upgrades to its core data networks in a bid to mitigate this risk.

 

Third-party suppliers

The Group acknowledges an increased risk associated with the use of third parties to perform core functions. The Group continues to enhance its third-party management framework and ensures that the procurement of service providers adheres to these requirements.

 

Funding and liquidity risk

Funding risk relates to the impact on the Group’s strategy of being unable to raise funds from customers and the wholesale markets of sufficient quantity and of appropriate mix and tenor. An inability to raise sufficient funds may lead to a reduction in lending growth or a requirement to raise the price paid for deposits, both outcomes having an adverse effect on shareholder value. Where funding risk manifests itself in an adverse effect on mix and tenor, for example, a high proportion of short-term wholesale deposits, there is an increased liquidity risk to the Group. Liquidity risk is the risk that the Group is unable to meet its current and future financial obligations as they fall due at acceptable cost. These obligations include the repayment of deposits on demand or at their contractual maturity dates, the repayment of borrowings and loan capital as they mature, the payment of operating expenses and tax, the payment of dividends and the ability to fund new and existing loan commitments