Shareholders in UK-based Clydesdale Bank (ASX: CYBG) have been dealt another blow today. Prior to today’s announcement, CYBG shareholders had already suffered a 60% loss during the year. Clydesdale surprised the market by forecasting that its legacy PPI costs would require provisions of between £300M ($540M) and £450M ($810M) to cover compensation and remediation associated with the PPI product. PPI is an insurance product often combined with loans sold to consumers. Customers almost always never needed it and struggled to make insurance claims against it. The bank expects to be able to provide a more accurate estimate of the PPI-related costs when it presents full year results on 28 November 2019. This final remark leaves investors with uncertainty regarding the true impact of the compensation and remediation.
Clydesdale’s Q3 Trading Update had pointed out that information requests regarding the PPI product had increased but that it was too early to determine if they would materialise. During August, around 9,000 daily requests were received by Clydesdale expressing concerns over PPI compensation. This was a greater number of requests than the prior 8 months combined. Furthermore, Clydesdale bore the brunt of elevated complaints throughout August, with around 5,000 per week during the first four weeks of the month and an inflated 22,000 complaints in the final 3 days of the month.
Clydesdale revealed that if the provision had been incurred as at June 30 2019, the Group’s CET1 ratio would have fallen between 130 and 190 basis points to between 12.7% and 13.3%, retaining a buffer of at least 1.7% above the fully-loaded CRD IV minimum CET1 capital requirement of 11.0%.
If regulation increases Clydesdale’s capital requirements, the bank could be required to raise capital at a heavily discounted valuation. Investors may be attracted to Clydesdale to diversify their income across multiple currencies to benefit from a falling Australian Dollar, with Clydesdale generating earnings in British Pound Sterling. However, there are valid concerns that Clydesdale could make further provisions, negatively impacting its CET1 ratio.
Bears worry that banks with low buffers above their capital requirements would perform most poorly in a recessionary environment where default rates and bad debt write-offs generally rise. Investors may want to look domestically towards Australian banks – all of which offer a yield far higher than the 1% RBA cash rate.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.