I am pleased to report that in our first year as a PLC, CYBG has delivered on our promises to our customers and shareholders.
We have built strong foundations and positive momentum going into 2017. We are optimistic about the future as the only true full service, challenger bank of scale to the status quo in the UK market.
Our 2016 results demonstrate the progress we have made on our journey towards being a more customer focused and commercially minded bank with continued mortgage loan growth ahead of the market; our SME book returning to growth for the first time in four years; a stable net interest margin; costs £33m below our initial guidance for the year; a reduced bad debt charge; and underlying profit before tax up 39% year on year.
Our strategy remains unchanged – our priorities of sustainable customer growth, efficiency and capital optimisation will be delivered by a strong customer focused culture, a robust approach to change management and investment, and development of our omni-channel capabilities, all within a framework of prudent risk management and governance. My focus, and that of my leadership team, is on execution, and our organic plan is predicated in large part on improving areas of our performance that we can control, such as costs and efficiency, thereby reducing the risk in delivering on our targets.
We will continue to evaluate potential inorganic opportunities to enhance our business, provided they are in line with our strategic objectives and will create value for our shareholders. We have established a set of capabilities (including a scalable digital platform, customer service excellence and senior management cadre) that give significant confidence in our ability to execute, should such inorganic opportunities arise.
Delivering on Key Metrics in 2016 - Part 2
DAVID DUFFY, CHIEF EXECUTIVE OFFICER (continued)
CYBG is committed to providing customers with a banking experience that is useful, simple and rewarding. We know that people want to manage money on their terms, not ours, so we will invest more than £350m over the next two years to simplify our business, drive cost and capital efficiency, maintain the resilience of our platforms and support the continued roll out of our omni-channel model. The delivery of our strategy will provide an improved branch experience, supported by a strong digital offering, reflecting the new face of banking and putting customers at the heart of what we do. We have already embarked on that journey with online account opening, B, and Apple Pay all going live during the year, and further launches planned for 2017.
CYBG is perfectly placed to disrupt the market – we have the full service capabilities that no challenger bank can offer, yet we are smaller and more agile than the complex structures of the ‘big 5’. We are well capitalised, have a high quality loan book and prudent risk appetite, along with powerful, established local brands, now joined by an innovative new brand in B which is already broadening our customer demographic and reach outside of our core regions.
We firmly believe that our size and scale, strong funding base and balance of assets across retail and business lending give us a solid foundation. Our flexibility will also enable us to selectively target growth opportunities in specific market segments as they arise and we remain focused on delivering improved returns for shareholders while adapting to the new economic environment.
While it is still too early to draw firm conclusions regarding the impact of the referendum vote to leave the EU, we are mindful of the greater uncertainty now facing the UK economy and how this will impact on our customers and the demand for credit. We will continue to support customers through the current period of uncertainty and beyond with our range of products for both consumers and SMEs.
Across CYBG we are focusing on the future with confidence. Over the next twelve months I am confident we will show continued progress against our targets and delivery of commitments for our customers, our people and our shareholders. Finally, I am very grateful to the Chairman and the rest of the Board for their backing and insight as we embark on the journey ahead.
Medium Term Targets Updated - Better and Faster - Part 1
In September this year we laid out our targets for the coming ﬁnancial year ending 30 September 2017. The operating environment continues to be dynamic, the impact of Brexit is not yet fully understood, and our markets remain competitive.
Looking further ahead, we also refreshed plans for the next three years to 2019, bringing forward and improving two key targets: we now anticipate that we will deliver, by the end of 2019, a CIR ratio of 55%-58% (previously <60% by 2020) and double digit RoTE (previously by 2020).
In order to deliver these targets we are targeting more than £100m of sustainable cost reductions by 2019, in addition to the cost savings already delivered in 2016, after incurring pre-tax restructuring costs of c.£200m.
Medium term targets updated - Part 2
We also expect to fully transition to the IRB basis of measuring RWAs on a whole bank basis during FY2019, subject to regulatory approval. Our CET1 ratio is expected to remain in the range of 12% to 13% throughout this period.
We also confirmed that our dividend ambition remains unchanged, targeting a modest inaugural dividend with respect to 2017 with a longer term goal to pay out up to c.50% of earnings (after paying AT1 distributions).