Clydesdale to post profit of £181m as conduct costs rise
Glasgow-based Clydesdale Bank is on track to report a 29 per cent jump in underlying net earnings to £181 million on Monday although the challenger bank's strong performance will be marred by a rise in conduct costs.
Clydesdale Bank owner CYBG - which also owns Yorkshire Bank - continues to cut costs as it works towards a target of more than £100 million of savings by 2019.
According to Morningstar’s David Ellis, the disappointing news of a £39 million hike in conduct costs does not affect his £181 million forecast as they are treated as significant items.
An early November update identified legacy conduct costs of £403 million with Clydesdale.
"CYBG is responsible for £39 million and National Australia Bank is responsible for the rest," Ellis calculated.
“This is under the conduct indemnity deed between the two banks established when NAB demerged and sold Clydesdale in February 2016."
On his analysis, conduct costs of £19 million pre-tax were recognised in first half fiscal 2017, with the second half £39 million taking the total to £58 million pre-tax for the year.
Further, CYBG now has £671 million in unused provisions for legacy conduct matters.
Importantly, the analyst said the remediation program is substantially complete, and the idle cover is sufficient to deal with legacy conduct matters.
From where he sits, the turnaround story is going well with management potentially surprising the market on Monday with a better-than-expected performance in loan growth and a strong cost-out outcome.
“Medium term, earnings will benefit from the Bank of England’s recent interest rate increase, the firm’s lower cost base, strong asset quality and improved operational efficiency,” he said.
“Underlying operating costs of £678 million are modestly below the previous updated guidance of less than £680 million as the business efficiency program gains pace."
Strong EPS growth
The analyst expects cost cutting, increased digitalisation, low loan losses and higher net interest margins to feature heavily in Monday’s release.
“We like the prospects for strong medium-term earnings growth, underpinned by steady loan growth, stable net interest margins, strong loan quality and a materially lower cost base."
Based on his forecasts, Clydesdale is a fast-growing bank with earnings per share expected to increase by an average of 10 per cent per year out to fiscal 2022.
To him, the bank's surplus capital position is a key differentiator with the future capital build leveraged to achieving advanced accreditation for capital adequacy.
The bank continues to target October 2018 as the start date for advanced risk modelling of mortgages - thereby attracting a lower risk weighting compared to the standard approach.
Acording to Ellis, the recognition of the £39 million pre-tax provision reduces common equity tier one capital ratio by approximately 20 basis points as at September 30, 2017 with the group’s key capital ratio expected to remain comfortably within its 12 per cent to 13 per cent guidance range.