It may have only been 77m, but the first statutory pre-tax profit in five years is nonetheless a major step forward for the parent of Clydesdale and Yorkshire Banks, CYBG (LSE: CYBG). This achievement is all the more remarkable when compared to the 285m loss CYBG posted in 2015 or the 19m pre-tax operating loss posted by RBS (LSE: RBS) in just the nine months through September.
Now, this return to profitability doesnt mean CYBG is a clear cut buy, but it does signal that the bank is in a far, far better position than its larger Scottish rival. Why? Three reasons: operating costs, restructuring efforts and growth opportunities.
RBSs struggle to tame high operating costs is nothing new to investors. In the three quarters to September the banks cost-to-income ratio was 94%. To be fair, this is an improvement on the 101% posted in the same period the year prior. Yet it remains both higher than CYBGs and is improving at a slower pace. From 2015 to 2016 CYBGs cost-to-income ratio fell from 120% to 88%.
There are a variety of reasons for this, including RBSs unwanted legacy divisions, higher IT costs and stricter regulatory compliance issues. However, the crux of the matter is that its much easier for CYBG to cut costs due to its much smaller size. In 2016 CYBG averaged 6,700 full time employees while RBS has averaged 82,500. With fewer employees and branches, CYBG has a much clearer and more viable path to slimming down operations.
Indeed, CYBG has been able to bring forward ambitious return on equity (RoE) and cost-to-income targets from 2020 to 2019. Meanwhile, RBS was forced in Q3 to admit that it will fail to reach its own cost-cutting targets for 2019. These diverging outlooks for future profitability dont bode well for RBS.
The RBSissue
With shares still stuck well below their pre-Financial Crisis peak its easy to forget that RBS was, for a very brief moment in 2008, the worlds largest bank. But, the sheer size of those globe-spanning assets helps explain why the current management team is still deeply mired in restructuring efforts eight years later.
The Sisyphean complexity, and cost, of these tasks is very clear when we look at RBSs income sheet. In Q3 alone the bank was forced to depart with 469m related to these efforts while CYBGs relatively healthier asset base forced only 45m in restructuring expenses in the whole of fiscal year 2016. RBS is slowly but surely spending less and less on this turnaround, but few analysts are expecting it to be completed for several years.
CYBG also bests RBS in growth potential due to its smaller size. Thus far, constrained to Yorkshire and Scotland, CYBG is currently in talks with RBS to purchase the Williams & Glyn branches that regulators have demanded be sold. Buying these 300 odd branches would both broaden CYBGs geographic exposure and more than double the banks branch numbers.
Finally, and perhaps most importantly for investors attracted to banks for their income potential, CYBG has declared 2017 as the year dividends begin. Analysts are penciling-in a small 0.9% yield in the first year, but management has confirmed
50% of earnings will be paid out in the future. RBS, of course, has yet to return to dividend payments and isnt going to for a long time yet.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.