The owner of Clydesdale and Yorkshire Bank published its results on Monday which showed a reduction in mortgage drawdowns in the three months to June 30 due to lower applications earlier in the year.
In a frank update, the bank warned that the mortgage market “remains extremely competitive”, something much of the sector agrees with.
The housing market has significantly slowed down since the vote to leave the EU in June 2016 and the Royal Institution of Chartered Surveyors is on record saying that the market is likely to stay sluggish in the coming months despite more properties being put up for sale.
A full-year loss would be damaging for the bank which was enjoying a new lease of life as a listed business after its former owner National Australia Bank divested it from its portfolio.
However Ian Gordon, a banking analyst at Investec, said the interim statement from CYBG was “underwhelming” and “illustrates the challenges which should ensure a loss in FY2018”.
He said: “CYBG has delivered steady income growth alongside absolute cost reduction through FY2016/17 (full year), which we broadly expect to continue through FY2018 to FY2020, driving further improvement in underlying profit before tax.
“However, conduct and restructuring costs have taken their toll, and, after the material PPI charge in the first half of FY2018, we forecast a loss in FY2018, before a return to profit in FY2019.”
Mr Gordon added that while CYBG is assuming the number of PPI claims will slow in 2019, this view is “out of line” with fellow lenders and “therefore somewhat heroic”.
Indeed CYBG has already booked a £350m charge in additional provisions in the first half of the year to deal with yet more PPI fallout.
The PPI scandal continues to be a millstone around the necks of our biggest banks. Indeed former Yorkshire Bank chairman Richard Gregory, a man who has worked for the bank for nearly 20 years, has described it as a tragedy for the banking sector as a whole.
Without doubt it has weakened the sector’s recovery since the financial crisis.
The concern over a loss comes during the biggest period of change arguably in a century for the bank as it prepares to merge with Virgin Money in a £1.7bn deal.
If it is approved following the usual scrutiny from regulators and shareholders it will become the UK’s sixth biggest bank. The Yorkshire Bank brand will vanish from the high street and it will enter a new modern period.
The one saving grace for its future can come from its admirable focus on emerging businesses.
Growth in its core small and medium-sized business division grew 4.7 per cent so far this year, with £420m of gross loans and facilities written in the third quarter.
Deposit balances have risen 4.5 per cent and a £350m incentivised switching scheme, designed to encourage SME customers to ditch their RBS account for rival banks, will open shortly.
If it can hold its nerve the bank can recover.
It has good leadership and a modern strategy.
However, with business confidence plummeting in the face of the growing likelihood of a no deal Brexit, one wonders about the likelihood of this situation improving any time soon.
Blackfriar hopes the bank can defy the odds and bounce back. But with the housing market and SME confidence facing torrid periods, one wonders where the demand will come from.