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CYBG capital dented by PPI

The challenger bank has received more complaints that expected during the first half
April 18, 2018

It turns out CYBG (CYBG) is not as shielded from the legacy of payment protection insurance (PPI) mis-selling as it may have thought. The challenger bank has been forced to increase its provisions for past PPI costs by £350m as at March 2018. With the remaining undrawn conduct indemnity deed with former parent National Australia Bank – provided upon the group’s public listing in 2016 – not enough to cover the amount, CYBG will recognise a £202m pre-tax charge in its first-half income statement.

IC TIP: Hold at 289p

That will result in a 100-basis point reduction in the banking group’s common tier-one capital (CET1) ratio to below its target 12-13 per cent range. A spokesperson for CYBG reiterated all of the group’s medium-term guidance, including "the aspiration to be a dividend-paying stock and to build to a sustainable payout ratio over time”. The group – which does not operate an ordinary dividend policy – paid a maiden 1p a share dividend for 2017. 

The challenger is in the process of switching its mortgage portfolio to a model based on the internal ratings-based approach, which typically requires less capital to be held against the loan book. That’s expected to complete by October. Shore Capital analysts believe it could release around £600m of surplus capital, offsetting “the dent in the balance sheet caused by the additional PPI provision”.