CYBG Plc

Disciplined Lending and Deposit Growth: CYBG Plc (ASX: CYB) operates through retail and commercial banks Clydesdale Bank, Yorkshire Bank, and through the digital banking service B.

Trading Update: The company recently released the trading update for the quarter ended 30 June 2019. During the period, the company witnessed a disciplined growth in assets and deposits, in-line with its strategy. The company reported a mortgage book reduction of 0.2% in the quarter, at £60.4bn. The reduction was attributable to lower new business volumes and higher redemptions in the period. The company witnessed a business lending growth of 0.5% for the quarter. Personal lending growth was at the rate of 5.7% to £4.8bn, owing to strong credit card growth. Due to the strong relationship deposit growth in the Business and Personal divisions, customer deposits reported a rise of 1.8%, at £62.8bn.


Assets and Deposits Growth (Source: Company Reports)

Annualised net interest margin for the nine months to 30 June 2019 stood at 168 bps, which was 3bps lower in comparison to 1HFY19 due to the re-financing impact of a large volume of mortgage redemptions in the third quarter. During the quarter, the company witnessed strong growth in unsecured lending, owing to strong performance in personal loan originations and continued growth across its credit card. The company’s integration programme reported good progress and is well on track to complete FSMA (Financial Services and Markets Act 2000) Part VII process in October 2019. The Group’s CET1 (Common Equity Tier 1) ratio increased to 14.6% at 30 June 2019.
FY19 Guidance: The company expects FY19 net interest margin to be at the lower-end of the guidance range of 165bps – 170bps.

Stock Recommendation: The stock of the company generated returns of 1.42% and -6.04% over a period of 1 month and 3 months, respectively. In Q3FY19, the company witnessed lending and deposit growth, in-line with its strategy. Although, business lending growth during the quarter was lower than expected, the company has a strong pipeline for the segment in the fourth quarter. The company continuously is progressing towards net cost savings target of c.£200 Mn by FY22 and had realised c.£45 Mn of annual run-rate savings as at Q3. Moreover, the business remains strongly capitalised with a CET1 ratio of 14.6%. On 31 July 2019, the stock was down 13.408% due to weak set of trading update for 3QFY19. However, by looking at decent pipeline of lending business in Q4,well capitalised balance sheet, and good progress towards Virgin Money Integration Programme, we give a “Hold” recommendation on the stock at the current market price of $3.100 as on 31 July 2019.

Challenger Limited

Relationship Expansion with MS&AD to Drive Japanese Sales:Challenger Limited (ASX: CGF) provides its services under two operating segments, namely Life Management and Funds Management. The company recently updated that it has been ceased to be a substantial shareholder of Speedcast International Limited.

The company also released an announcement stating that it has now received all regulatory approvals to commence reinsurance of US dollar denominated annuities from 1 July 2019.

Agreement with MS Primary: Under the new agreement with MS Primary, the company will commence reinsuring US dollar denominated annuities issued by MS Primary into the Japanese market. MS Primary will provide the company with an annual reinsurance amount approximating to at least A$670 million per year for a minimum of 5 years. The amount provided will involve both Australian and US dollar annuities. MS&AD is also planning to increase its ownership in Challenger Limited above 15% of issued capital and seeks to appoint a representative to the company’s Board.

March Quarter Highlights: During the quarter, the company reported total assets under management amounting to $81 billion, up 4% during the quarter. Funds under management were reported at $78.1 million, up 4% for the quarter. The company reported total life annuity sales of $662 million, down 13% on the prior corresponding period.

Australian annuity sales were reported at $607 million, down 7% on the prior corresponding period. Annuity sales in Japan witnessed a decline of 49%.


Total Group Assets and FUM (Source: Company Reports)
 
FY19 Guidance: The company reaffirmed FY19 guidance for normalised net profit before tax in the range of $545 million and $565 million. FY20 normalised net profit before tax is expected to be in the range of $500 million to $550 million. Normalised dividend payout ratio for FY19 and FY20 is expected to be between 45% and 50%.


Financial Outlook (Source: Company Reports)

Stock Recommendation: The stock of the company generated returns of 3.55% and -14.84% over a period of 1 month and 3 months, respectively. In the last 1-year, the stock has corrected ~43%. Annual dividend yield for the stock stands at 5.07%. During the March quarter, sales were impacted by lower Japanese sales and industry disruption. However, the company made good progress in implementing strategies to build further resilience through relationship expansion with MS&AD in Japan and other new domestic distribution relationships. The company’s new agreement with MS primary will significantly increase its Japanese sales and help diversify its product offerings in the country. Based on the above factors, we give a “Buy” recommendation on the stock at the current market price of $7.090, up 1.286% on 31 July 2019.

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