CLYDESDALE bank owner CYBG has highlighted tough conditions in the UK mortgage market as its chief executive David Duffy underlined his belief in the rationale for the planned £1.7 billion takeover of Virgin Money.

Mr Duffy said CYBG still expects to complete the takeover of Virgin Money in the fourth quarter, subject to approval by shareholders, in a move that will pave the way for the Clydesdale brand to be phased out.

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The group, which also owns Yorkshire bank, has said it plans to rebrand its operations as Virgin Money in time following the takeover.

The takeover is expected to be followed by around 1,500 job losses across the enlarged group under cost-cutting plans.

Yesterday Mr Duffy said: “We continue to expect our recommended all-share offer for Virgin Money to complete in calendar Q4 2018, subject to shareholder and regulatory approvals, creating the UK’s first true national competitor to the status quo.”

He said CYBG had delivered another solid performance in the quarter to 30 June, trading in line with expectations.

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But CYBG stressed the mortgage market remains extremely competitive with continued pressure on pricing.

There have been signs the housing market is cooling in parts of the UK such as London.

Kapilan Pillai, equity analyst at Jefferies, said CYBG had echoed the pressures on mortgage pricing the brokerage had seen at all UK lenders in the latest quarter.

The outlook for the market is clouded amid expectations interest rates will increase steadily in coming months. The Bank of England is expected to hike the base rate by 0.25 per cent to 0.75% when its monetary policy committee meets later this week.

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CYBG has faced complications in the mortgage business following a shake up of its processing operations which impacted on application levels. It is confident volumes will return to expected levels in the fourth quarter, leaving annual growth in mortgage lending at the lower end of the group’s guidance range.

Mr Duffy noted: “The economic and political environment in the UK remains uncertain.”

However, he said the group remained focused on a strategy that should deliver growth.

CYBG maintained profit margins on lending overall in the third quarter, with improved profitability in the core small and medium sized enterprise market offsetting the pressure on mortgage business.

The takeover of Virgin Money would allow CYBG to add a big credit card lending business and result in a significant increase in customer numbers.

CYBG clearly sees potential to use the Virgin Money brand to help win business from bigger rivals in the retail and SME markets.

Announcing the recommended offer, in June, CYBG said it envisaged the retail brand for the combined group would transition to Virgin Money over 36 months after the takeover.

Chief operating officer Debbie Crosbie said then the ambition was to use the Virgin Money brand for SME operations depending on feedback from customers.

CYBG directors expect the combined group to generate £120 million of annual pre-tax cost synergies, helped by removing duplication of back office functions, rationalising senior management roles and optimising the branch network. They have not said where jobs will be shed.

Clydesdale employs around 1,700 in its Glasgow offices.

The bank has announced plans to close 42 branches in the last 18 months. It will have 67 in Scotland when the work is complete.Virgin Money is stronger in England.

CYBG grew mortgage and SME lending by 3.8% and 4.7% respectively in the first nine months. Deposits grew by 4.5%.

Shareholders in CYBG and Virgin Money will vote on the proposed takeover on 10 September.

Mr Duffy will lead the enlarged group if the deal completes to plan. Virgin Money chief executive Jayne-Anne Gadhia will serve in a consultancy role as his senior adviser.

John Moore, Senior Investment Manager at Brewin Dolphin Edinburgh, said CYBG’s third quarter results showed sustainable growth, with further cost and process efficiencies achieved.

He added: “CYBG, along with Virgin, has been one of the best performing banks in the UK and the forthcoming merger should accelerate and enhances its prospects.”