The owner of Clydesdale and Yorkshire banks – CYBG – swung into the red after seeing a rise in the costs relating to the mis-selling of payment protection insurance.
The group, which made a £1.6billion offer for Virgin Money last week, fell to a pre-tax loss of £95million in the six months to the end of March, from profits of £46million in the same period last year.
The loss comes as the lender incurred a previously-announced £350million charge for claims relating to its mis-selling of PPI.
Shares in FTSE 250-listed CYBG fell 5.2 per cent to 306.4p.
In the red: Rising costs for PPI mis-selling pushed CYBG into a loss
CYBG said it expects to see 110,000 walk-in PPI complaints between this August and the deadline in August 2019.
CYBG also put by another £18million for ‘other legacy conduct issues’. On an underlying basis, it posted a 28 per cent rise in half-year pre-tax profits to £158million.
Its net interest margin, a key measure for retail banks, fell in the fist half – and the lender said it expected trading conditions to remain ‘challenging’ amid a slowdown in consumer spending and borrowing and a competitive mortgage market.
‘Spending has slowed and businesses have been holding back investment, which has had some impact on demand, but with credit conditions remaining benign,’ the lender sad.
‘In the mortgage market, the economic uncertainty has reduced customer demand, while competition has remained intense and this has resulted in a challenging pricing environment.’
Challenger banks are struggling to compete with bigger rivals, hence CYBG’s offer to take over Virgin Money – which could be the first of a series of takeovers among smaller banks.
Takeover bid: CYBG made a £1.6billion offer for Virgin Money
Last week, CYBG made an all-share offer which would see Virgin Money shareholders receive 1.13 new CYBG shares for each Virgin Money share. The deal means Virgin Money shareholders would own around 36.5 per cent of the new business.
The deal could mean a major payout for founder Sir Richard Branson, whose Virgin Group holds a controlling stake in the lender.
But it is by no means a done deal, according to banking expert Gary Greenwood at Shore Capital, whose concerns include price and complications of combining IT systems.
He said: ‘We think it is by no means certain that CYBG will make its proposal formal when the deadline for making such an offer expires on June 4.
‘Even then, we think it may need to sweeten its offer in order to get the recommendation of Virgin Money’s management, with a larger premium meaning that more of the benefits would accrue to Virgin Money’s shareholders.’