LONDON (Reuters) - Shares in Britain’s CYBG (CYBGC.L) fell as much as 6 percent on Tuesday, as the mid-sized lender reported a disappointing first-half loss of 76 million pounds and gave no update on its bid for Virgin Money (VM.L).
The slide in CYBG’s stock will depress the value of its all-share bid for its rival mid-sized bank announced last week, which it said would create one of Britain’s biggest lenders.
Shares in Virgin Money stood 3.8 percent lower by 0950 GMT, as investors assessed the impact of the reduced buying power of CYBG’s shares on the likelihood of the 1.6 billion pound ($2.2 billion) deal closing.
CYBG’s disappointing set of first half results highlighted the importance of the deal to its long-term fortunes, with analysts seeing the stronger Virgin Money brand as a key attraction for CYBG.
“This shows the strategic imperative for CYBG to deliver on a Virgin deal, because the problem they’ve got is revenue and what’s clear is that a Clydesdale or a Yorkshire bank brand doesn’t cut the mustard,” said Edward Firth, managing director for UK banks and Brokerage Keefe, Bruyette & Woods.
“Clearly a Virgin brand across the whole group could revolutionise the outlook, but they’re not paying enough.”
CYBG, owner of Clydesdale and Yorkshire Bank, made its London market debut in 2016 after it was spun off by National Australia Bank (NAB.AX).
Its bid for Virgin Money comes as Britain’s mid-sized banks fight the competitive squeeze from bigger rivals with more to spend on technology, and from nimbler digital-only banks with lower costs.
CYBG’s loss stemmed from a previously announced 350 million pound charge for the mis-selling of payment protection insurance (PPI), which Chief Executive officer David Duffy described as disappointing.
CYBG reported the PPI hit in March after a media campaign by Britain’s financial watchdog boosted claims by customers against banks for Britain’s costliest-ever consumer scandal, in which people were mis-sold often worthless insurance products.
Duffy said that the “strong capital position” of the group meant that CYBG could absorb this hit without changing its future strategy or aspirations, but analysts warned the bank’s rate of customer claims could see it need to take yet more charges for compensation.
The bank reported a Tier I capital ratio of 11.3 percent, below the 12-13 percent range that it aspires to. Analysts expect the bank will draw on capital to fund some of its bid for Virgin Money, with CYBG expected to benefit from a capital windfall due to an expected change to risk models.
CYBG has until June 4 to either make a firm offer or walk away from its bid for Virgin Money, a move that sparked wider talk of consolidation among British mid-sized lenders when it was announced.
Reporting by Emma Rumney and Lawrence White; Editing by Louise Heavens and Keith Weir