Shares in CYBG dropped 6.7% to $5.19 yesterday after the ASX-listed parent of British banks Clydesdale, Yorkshire revealed another increase in provisions for costs associated with the miss selling of payment protection insurance (PPI) by around £350 million ($A645 million).
The miss selling of PPI insurance is a multi billion dollar headache for the UK banking sector with total provisions, fines and other costs well in excess of £35 billion and still rising.
The extra provisions means that CYBG will have to start providing the provisioning from its own accounts after using up all of the net £1.1 billion its former owner, National Australia Bank left in a special fund as part of its exiting of the UK banking market in 2016.
That left the bank with tens of thousands of Australian shareholders as NAB shares were given shares in the new stand alone bank.
CYBG said that its review of final PPI cases was more complicated and time-consuming than previously expected. It also said that complaints rose to a higher-than-expected 59,000 in the six months to the end of March, peaking in January.
“The elevated level of complaints has been driven by a combination of factors including heightened media coverage, the FCA advertising campaign and increased activity by claims management companies,” it said in a statement issued in the UK overnight Tuesday.
It added that it expects current level of complaints to remain at an elevated level for a period of time before reducing in volumes and costs by August 2019.
As a result of the extra provisions, CYBG will recognise a pretax charge of £202 million in its income statement for the six month period ended March 31 2018 which is expected to result in a pro forma reduction in the Group’s Common Equity Tier 1 ratio of approximately 100 basis points as at 31 December 2017.
The provisioning from its own balance sheet was necessary because the £148 million balance of the £350 million set aside came from the fund the NAB left behind and in fact drained it.
“Under the terms of the conduct indemnity deed with National Australia Bank the remaining undrawn indemnity amount of £148 million will be fully utilised, with the balance funded by CYBG,” CYBG said in its statement.
As part of its decision t leave the UK, the NAB had to leave behind a large enough fund to settle future PPI claims from March 2015 onwards.
The then UK Prudential Regulatory Authority required the inclusion of a £1.7 billion contingent conduct charge indemnity which was the regulators calculation for potential losses not covered by provisions up to March 2015. Of the £1.7 billion provision, CYBG was responsible for £120 million of the aggregate liability “for Relevant Conduct Matters under a loss sharing arrangement” with National Australia Bank (NAB) responsible for the remaining £1.58 billion. Of the £1.58 billion NAB provision, CYBG was given £465 million by way of a capital injection, which then capped NAB’s provision at £1.11 billion. The indemnity was in addition to the £986 million provision taken by CYBG as at September 2015, providing total cover of £2.1 billion, not including CYBG’s loss share of £120 million.
That £1.11 billion has now gone completely and all future costs (if any) will come out of the CYBG balance sheet. The extra provision of £202 million is likely to see CYBG report a loss or a small profit for the six months to March 31.