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CYBG to operate below guidance as PPI costs escalate
CYBG announced on Wednesday that it expects to increase its provisions for legacy PPI costs as at 31 March by £350m, with the provision amount subject to the finalisation of its half year results for the six months ended 31 March.
The FTSE 250 banking group, which operates the Clydesdale Bank, Yorkshire Bank and 'B' consumer brands, said that under the terms of the conduct indemnity deed with National Australia Bank, the remaining undrawn indemnity amount of £148m would be fully utilised, with the balance funded by CYBG.
It said it therefore expected to recognise a charge of £202m pre-tax in its income statement for the six month period ended 31 March.
That would 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 group, which has been operating two PPI programmes concurrently over the past six months, comprising the proactive customer contact remediation exercise and customer-initiated new complaints handling, has now completed its review of all cases within the scope of the remediation programme.
The board said the review of the final cases was "more complicated and time-consuming" than previously anticipated and, as a result, it increased the provision required to close-out the programme.
Within the customer-initiated complaint programme, CYBG experienced a sustained period of elevated complaints in the six months to 31 March, with the peak occurring in January, in line with the rest of the industry. The group received around 59,000 complaints during the period, which was higher than forecast.
CYBG said the elevated level of complaints was driven by a combination of factors, including heightened media coverage, an advertising campaign from the Financial Conduct Authority, and increased activity by claims management companies.
The Financial Conduct Authority's new campaign features Arnold Schwarzenegger's animatronic image prompting more consumers to apply for for PPI compensation. The FCA's previous campaign featuring Schwarzenegger spurred a jump in people complaining directly to banks about being mis-sold payment protection insurance.
"In determining the level of additional provision required, the group has conducted a detailed review of its recent experience and undertaken a robust scenario analysis to reassess its view of the outlook for complaint volumes," CYBG explained in its statement.
"The group now expects the current level of complaints to remain at an elevated level for a period of time, followed by a reduction in volumes and costs as we approach the time bar in August 2019."
Having considered those factors, the CYBG board approved an increase to its provision of £350m to cover a number of costs, including £88m in relation to the costs required to close-out the final cases investigated as part of its completed remediation programme.
That total also included £186m for around 110,000 additional customer-initiated complaints received before the August 2019 time bar, and £76m for the costs of administering the redress programmes.
"While the impact on the group's CET1 ratio of approximately 100 basis points means it will be operating below its guidance range of 12-13%, the group continues to maintain a significant buffer to its regulatory capital requirement," the CYBG board explained.
"The group remains confident in the business delivering net capital generation going forward and is on track to deliver its medium-term targets."
CYBG said it was continuing to progress its IRB application with the PRA, and was confident of achieving accreditation for its mortgage portfolio within the next six months.
"Following this, the group would work with the PRA to determine its IRB regulatory capital requirement.
"As previously guided, the adoption of IRB models is expected to result in a material reduction in the group's credit RWAs and a consequential significant increase in the group's CET1 ratio."
CYBG said it would provide a detailed financial update at its interim results on 15 May.