Mortgage originations were “lower” in Q3 compared to Q2 “but at better margins as pricing stabilised”, the lender’s latest trading statement said.

It also blamed “a large volume of redemptions” for a contraction in net mortgage lending in its financial third quarter ending 30 June 2019.

The mortgage book reduced by 0.2 per cent to £60.4bn as of end-June, down from £60.5bn at end-March.

The bank’s net interest margin fell by 3 basis points (bps) to 168 bps in Q3 owing “to the refinancing impact of a large volume of mortgage redemptions”.

Net interest margin is the difference between what it pays for deposits and earns from lending.

The bank expected that net interest margin for the full year would come in at the lower end of the previously stated range 165 to 170 bps owing to the mortgage redemptions.

Performance on track

CYBG outlined its strategy for mortgages in June this year having completed a takeover of Virgin Money in October 2018.

David Duffy, CYBG chief executive (pictured), said: “Our net interest margin is tracking as expected and we delivered further cost efficiencies in the period – even with the twin pressure of Brexit and the highly competitive mortgage market, we remain on track to deliver full year performance in line with our guidance.”

The group reported business lending growth of 0.5 per cent to £7.7bn and personal lending up 5.7 per cent to £4.8bn in Q3.

Customer deposits grew by 1.8 per cent to £62.8bn.

CYBG was the latest lender to be hit by competition in the mortgage market after Santander reported net interest income down 8 per cent in H1 owing to attrition of standard variable rate deals.

The group, which includes Clydesdale Bank, Yorkshire Bank and Virgin Money, will also commence a rebranding of all its banking offerings under the Virgin Money name this year.

Announcing the changes, the lender said it was aiming to maintain around a four per cent share of the mortgage market.

Two new branded offerings will be launched for the broker market: Virgin Money Everyday for mainstream lending and Virgin Money Expert for more complex lending offers, “combining the strengths of both Virgin Money and CYBG in the mortgage market,” the lender said.

It added that mortgage customers and brokers would benefit from significant investment across all mortgage channels.

This will include “leveraging of APIs (application programming interfaces) and wider technology capabilities to enhance the broker platform and extend reach to thousands of new broker partners”.

A new online and mobile mortgage hub for consumers including an artificial intelligence mortgage assistant will also be launched.

Rebrand timetable

CYBG PLC will change its name to Virgin Money UK PLC in late 2019, with the entire business to operate under the Virgin Money brand by the end of 2021.

The rebrand of the B digital bank to Virgin Money will begin in 2019, to complete in the first half of 2020, includes the rebranding of B’s flagship stores to Virgin Money.

Yorkshire Bank will begin rebranding in late 2019 and Clydesdale Bank will begin in the second half of 2020.

The lender noted that the decision to retire the Clydesdale and Yorkshire brand names was not an easy one, but doing so would allow it to realise efficiencies and grow the business throughout the UK.

A Virgin money branded business bank will also be launched by summer 2020 with a full-service current account going live by the end of this year.

Desire to disrupt

Addressing the rebrand and updated medium-term strategy, CYBG CEO David Duffy highlighted that consumers were increasingly using technology to complete the financial transactions.

“Banking is changing at an unprecedented rate. Consumers are using new technology in every part of their lives. With amazing customer experiences available in other industries, they are rightly demanding so much more from their banks,” Duffy said.

“We have a clear ambition to disrupt the status quo with the new Virgin Money. Our new financial targets will deliver a significantly more efficient and profitable business with strong and sustainable returns for our shareholders.

“Despite the ongoing Brexit headwinds and continued competitive pressures, the strength of the combination gives us every confidence we will deliver on our targets,” he added.

Overall it completed £5.8bn in new mortgage lending during the six months between 1 October 2018 and 31 March 2019.

In interim first half results published today, the lender noted that the market had remained “highly competitive” due to a large number of active lenders and surplus cash from ring-fenced banks.

This, it highlighted, had led to “an over-supply of lending and dilution of mortgage margins”.

As a result, CYBG said it would be cutting back in certain sectors, but did not name those areas.

“We expect the pace of lending growth in our mortgage book to slow in the second half as we look to optimise the mix of lending in our portfolio and proactively reduce volume in selected segments in order to mitigate some of the margin pressures,” it said.

It added: “The uncertain economic backdrop and the maturity profile of business means that the gross lending market continues to be driven by remortgaging activity, up 10 per cent on the prior period.

“We continued to see a growing number of customers favour longer term fixed rate mortgage products, as customers seek to further capitalise on the prevailing low interest rate environment. “Conversely, UK variable rate and Standard Variable Rate (SVR) balances have reduced.”

Higher margin LTVs hit

In a sign of the competitive market, net interest income was down one per cent on the first six months of 2018, driven by mortgage rates, including more recently at higher loan to values (LTVs).

Group net interest margin (NIM) had reduced 1.71 per cent, down from 1.84 per cent in March 2018, but was stable compared to the 1.72 per cent in the second half of 2018.

“The largest impact on group NIM has been the continued dilution in mortgage margins due to sustained competition and more recent pressure in the higher margin segments of the market,” CYBG said.

“Furthermore, we continue to see mortgage customers favouring fixed rate deals and this customer preference, alongside proactive early retention programmes across the industry, continues to exert pressure on mortgage margins through competitive fixed rate pricing and lower SVR balances.”

£5.8bn lending

CYBG finalised the takeover of Virgin Money on 15 October, and the bank increased its mortgage loan book by 2.5 per cent to £60.5bn.

The average loan to value (LTV) of new lending increased slightly to 69.5 per cent from 68.8 per cent and the average LTV of the mortgage book also increased to 58.2 per cent from 57.3 per cent.

The proportion of residential mortgages 90 days in arrears was stable at 0.30 per cent.

CYBG acknowledged that the buy-to-let property market had been more subdued following the tax relief changes for landlords, the increase in stamp duty and enhanced affordability assessments.

Underlying profit before tax of £286m was five per cent lower year-on-year due to the expected acquisition and integration costs, but was up two per cent on the previous six months.

Mortgage pricing stabilising

CYBG chief executive officer David Duffy said the bank had delivered a resilient underlying financial performance and that its three-year integration programme was making good progress.

“As previously announced, we have also increased our forecast of the total cost synergies available by £30m to a minimum of £150m by the end of financial year 2021.”

“Despite sustained competition in the mortgage market and a continued uncertain economic backdrop, we have delivered solid growth in our mortgage book and we have seen signs that mortgage pricing has started to stabilise.

“We remain on track to deliver 2019 performance in line with guidance and look forward to updating the market in June on our refreshed strategy and the significant opportunities for our combined business,” he added.

The firm said it had benefited from a strong pipeline of cases coming into the quarter, as well as good customer retention levels.

Overall the customer loan book rose by 1.4% to a total of £71.9bn.

However the lender’s net interest margin for the quarter dropped to 172bps, with CYBG forecasting that across this financial year it will drop down to between 165-170bps, which it put down to “sustained pricing pressure in the UK mortgage market”.

It noted that the dynamics of the mortgage market are likely to remain unchanged over the next 12 months, which means the lender is likely to see net mortgage lending growth for the year to fall “as we focus on optimisation of volume and value”.

Virgin Money integration hits £261m

CYBG purchased Virgin Money for £1.7bn in October last year. The purchase had led to £161m of ‘exceptional charges’ with a further £100m of integration, rebranding and restructuring costs anticipated across the rest of this financial year.

David Duffy (pictured), chief executive officer at CYBG, said the firm had made a good start to the year and was making “encouraging process” on the initial stages of the three-year integration programme with Virgin Money.

The statement from CYBG noted that the “rationalisation” of the top two layers of senior management was now largely complete, following the purchase, while the VM Digital Bank project has been closed down.

Duffy noted that in a “highly competitive environment” CYBG had delivered “ahead-of-market lending growth”, concluding: “Market conditions remain uncertain while we await the outcome of the Brexit negotiations, but we remain focussed on supporting our customers and delivering against the factors within our control.”

In its 2018 annual results, CYBG confirmed lenders were choosing to swallow the increases and take the hit on their margins.

Its results showed a 10 basis point fall in net interest margin to 2.17% which was “driven by the competitive front book pricing environment in mortgages”.

CYBG also acknowledged it had experienced issues with broker servicing around the start of 2018 which had hit its pipeline, but said these had been solved with normal levels of growth returning.

In all, around 80% of its £5.2bn mortgage sales during the year were completed through brokers, with market share rising slightly from 1.73% to 1.77%.

“In late 2017, we brought mortgage processing back onshore, as part of our customer journey improvement initiatives,” it said.

“Some servicing and fulfilment delays arose resulting in our broker pipeline build being lower than we had hoped, with mortgage growth slower around the third quarter of the financial year when we felt the impact of lower applications at the start of 2018.

“These issues are now resolved, with a return to a more normalised level of growth in the final quarter.”

CYBG added that the outlook for the UK lending market was more subdued than in recent years.

“In the mortgage market, economic uncertainty has reduced customer demand while competition has remained intense, resulting in a challenging pricing environment, with swap rate increases not being fully passed on to customer pricing,” it said.

“We expect to see strong competition for mortgages and deposits in the year ahead that will feed through into margin pressure.”

Fixed-rate deals favoured

CYBG’s loan book grew 4.5% to £24.5bn with the loan to value (LTV) of its mortgage portfolio rising slightly to 58.8% from 57.5%.

It noted that customers were continuing to favour fixed rate mortgage products with its fixed rate book growing to 78% of total mortgage balances and accounted for 96% of mortgages drawn in the year.

Longer term fixed rate mortgages are growing more popular with five-year fixed mortgages now accounting for 27% of the portfolio, compared to 22% in 2017, it added.

The buy‐to‐let (BTL) property market has been more subdued with this falling from 33% to 31% of business.

Landmark year

CEO David Duffy, said it had been a landmark year for CYBG including the takeover of Virgin Money.

Underlying profit before tax was up 13% year-on-year to £331m but the group suffered a statutory loss after tax of £145m due to legacy payment protection insurance costs.

“In a competitive market, we have delivered an increase in underlying profits, returns and capital generation – all of which means we are delighted to recommend an increase to last year’s inaugural CYBG dividend, payable to all shareholders,” Duffy said.

“Clearly Brexit negotiations mean the external political and macro-economic environment remains inherently uncertain.

“We have planned for a period of uncertainty, but it is impossible to ignore the lower levels of business confidence, especially for SMEs, while the final specific outcome of negotiations remains unclear.”

CYBG Group initially offered around £1.6bn for Virgin Money in May with 1.1297 new group shares in exchange for each Virgin Money share, but later upped its offer to 1.2125 new shares, which has been accepted.

It will leave Virgin Money shareholders owning approximately 38% of the combined group when the deal is completed.

The combined bank will have a little over 5% of the UK mortgage market, according to last year’s data from UK Finance.

It will have a £57.8bn portfolio of mortgages, representing 83% of total customer lending, with an average indexed loan-to-value of 57.2%, a net cost of risk of one basis point and a non-performing loan ratio of 0.6%.

A statement from the two institutions said it expects a significant majority of Virgin Money mortgages and cash ISAs to be migrated to CYBG platforms on renewal.

Overall an estimated 30% of all accounts of the combined group will be part of a transfer or migration process within its proposed integration plan.

The statement added that the IT migration will be phased over 36 months “to minimise execution risk with operational integration phased over a similar timeframe”.

Six million customers

CYBG CEO David Duffy said the move would create a national, full-service bank with the capabilities needed to compete effectively with the large incumbent banks.

“Together we will serve around six million customers, with the scale, capabilities and financial muscle to disrupt the status quo – and with a clear ambition to provide our customers with the best service in the UK,” he said.

“The strategic rationale is clear and offers both sets of shareholders real value, material earnings accretion, and enhanced capital generation for the benefit of all shareholders, together with both firms’ customers, colleagues and local communities.”

Virgin Money CEO Jayne-Anne Gadhia added that the offer reflected confidence in the bank’s strategy, track record of delivery and the complementary strengths of the two businesses.

“The combination of Virgin Money with CYBG will have greater scale to challenge the big banks. It will also accelerate the delivery of our strategic objectives, particularly the expansion of the products we offer to customers,” she said.

“The combined group will remain a committed voice behind the Women in Finance Charter as well as working to reduce the gender pay gap,” she added.

It reported that the average two-year fixed rate has dropped from 4.11% at the start of May to 4.06% today. Meanwhile, the average five-year fixed rate has fallen from 4.49% to 4.43%.

As a result, both rates are now lower than they were this time last year, despite bank base rate having risen since then.

Charlotte Nelson, finance expert at Moneyfacts, noted that rates across the board had been increasing in anticipation of a base rate rise in May, which didn’t actually take place.

But while the rest of the market has continued on its upward trajectory, rates on higher LTV deals are “forging their own path”.

Nelson continued: “Competition in this sector is high particularly among lenders looking to revitalise their mortgage book by bringing new borrowers on board. And it is not just rates providers are using to attract these new borrowers, as an array of different incentive packages and fees means borrowers can now tailor their mortgage to suit their needs.”

Recent months have seen a swarm of lenders launch deals at 95% LTV, including Barclays, Yorkshire Bank and Sainsbury’s.

Back in March, the number of deals available at this LTV topped 300 for the first time since the financial crisis.

Yorkshire Bank has cut rates on its five-year fixed-rate at 95% loan to value (LTV) to a market leading 3.89%, which comes with free valuation, £250 cashback and no fees.

And Sainsbury’s has today revealed a string of mortgages for first-time buyers with a 5% deposit, including a two-year fixed rate at 3.69% and five-year fix of 4.05%

Both the deals are fee-free, and again come with £250 cashback and free valuation.

Hitting the heights

First-time buyers are at their highest levels in 11 years, according to the latest UK Finance figures.

And it appears lenders are now battling to offer some of these borrowers ever better deals.

Tesco Bank also launched new mortgage rates this week, which included a two-year fix of 3.89% and five-year fix of 4% at 95% LTV.

West Brom BS has also today reduced selected to offer a five-year fix of 3.94% at 95% LTV.

Rachel Springall from Moneyfacts.co.uk said: “It’s fantastic to see some heated competition in the market among lenders looking to entice borrowers with as little as a 5% deposit.

“A number of the new deals to surface this week are offering not just a reasonable interest rate, but also either a cashback incentive or a low product fee – ideal for first-time buyers trying to keep their upfront costs down.

“First-time buyers need as much help as they can get.

“If they are struggling to get onto the property ladder they should do their best to take advantage of Government initiatives such as Help to Buy ISAs to boost their deposit.

“If borrowers can afford to do so, they should attempt to push their savings to raise a 10% deposit as they will find much lower interest rates available in this arena.”

In a communication issued to the market on Friday regarding its residential mortgage borrowers, the lender said: “Following on from the Bank of England’s decision yesterday to cut interest rates to 0.25%, we would like to confirm that this will have no tangible effect to our products. We apply a floor to the rate of 0.50% and therefore no changes are required.”

Shawbrook Bank declined to offer any further comment on whether the product condition would impact its competitive position in the second charge market, which at present represents the scope of its residential lending.

Immediately after the 0.25% rate cut announcement issued on Thursday 4 August, lenders began to reveal their intentions to pass on the rate cut, in most cases to all variable rate mortgage borrowers. This includes those on base-rate trackers, discount products or Standard Variable Rates. However, a handful, namely Lloyds Banking Group, Yorkshire Building Society and NatWest are all reviewing their stance on SVR mortgages and have yet to announce what, if any, reduction will be passed on to borrowers on these rates.

Clydesdale and Yorkshire Banks and Skipton Building Society have so far held back on what they plan to offer their variable-rate mortgage borrowers.

Non-high street banks Precise Mortgages and Paragon are the latest two lenders to tell borrowers that they will pass on the 0.25% rate cut in full to customers, which they were urged to do by Bank of England governor Mark Carney.

A spokesperson for Paragon Mortgages said: “Base-linked mortgages will reduce in line with the Bank of England base rate and customers will be notified of their new rate.”

Alan Cleary, managing director at Precise Mortgages, said borrowers on variable products would see a drop in rates, commenting that the 0.5% floor, applied by Shawbrook, was unusual.

He said: “I don’t think it is common in the market, although a lot of us will have a floor of zero so you don’t allow the rate to go negative, as it would cause all sorts of issues. But I don’t think it is common to have one that is 0.5%, I think Shawbrook is unusual in this regard.”

In its interim results, for the six months to 31 March, CYBG said digital channels represented 24% of total sales, which were almost double those seen in 2013.

The group’s digital platform, B, launched initially with a savings and current account offering and will have a mortgage product added later this year.

Intermediaries continue to be the main driving force behind the growth in CYBG’s mortgage portfolio.

In terms of its product mix, the group intends to rebalance growth towards owner-occupied mortgages and away from buy to let.

Its mortgage portfolio increased by 4.9% from £20.5bn during the six months to 30 September 2015 to £21.5bn by the end of March. The balance of mortgage lending rose through the broker channel rose by £1.1bn to £12bn.

The demerger from National Australia Bank and its Initial Public Offering (IPO) leading to a listing on the London Stock Exchange and Australian Securities Exchange, completed on 8 February.

The group reported statutory profit before tax of £58m compared to £155m for the six months to March 2015 and the loss of £440m recorded in the six months to September 2015.

CYBG said it was on target to bring its costs for the full year in at the £762m, which it laid out during its IPO presentation. The group said it was making good progress with its cost cutting strategy. In addition to its plans to close 26 branches this year, announced in April, it has implemented a voluntary severance scheme for senior staff.