Small banks bite the dust
Another challenger to the big four lenders is to vanish now that Nationwide is taking over Virgin Money. What next? Matthew Partridge reports
When Virgin, Tesco and other newcomers joined the banking sector, “it looked as if there was a new dawn”, says Alex Brummer in the Daily Mail. However, with Nationwide announcing last week that it would acquire Virgin Money for £2.9bn, on the heels of Barclays buying Tesco Bank, it seems these “challenger banks” are now “falling like ninepins”. This is a “great shame”. The services offered by the big four lenders are “deteriorating”, with branch closures leaving small businesses and individual customers “feeling isolated”. The only consolation is that as a mutual, Nationwide “should be a kinder and gentler owner than the alternatives”.
You could argue that because Nationwide is a building society and “sits in the industry’s second tier”, it is “a different type of challenger”, says Nils Pratley in The Guardian. But this is a “far cry” from 2018, when Virgin was talking about creating “a genuine alternative to the large incumbent banks”. It also underlines the “uncomfortable truth” that “size remains an enormous advantage in retail banking, in terms of everything from funding costs to investment in… whizzy apps”.
A bargain price?
Virgin has struggled owing to its lack of scale; its cost of equity exceeds its return, so it has destroyed shareholder value, says Lex in the Financial Times. The stock has “crab walked sideways for five years”, even when you take the 35% jump in price as a result of Nationwide’s bid into account. Still, Nationwide “isn’t really stumping up much to become the UK’s number two retail bank”. The offer values the bank at approximately 0.6 times tangible book value. Virgin’s board “could perhaps have driven a harder bargain”.
Virgin Money “brings diversification, more credit card clients and a big enough mortgage book for the combo to leapfrog NatWest” and become Britain’s second-biggest bank after Lloyds, says Alistair Osborne in The Times. However, the deal “is not without its risks”, as £90bn of assets are being added to the balance sheet. Systems integration could also prove the “typical nightmare”, while Virgin is known for “lousy service”. Given that Virgin Money’s customers will not automatically become Nationwide members, you could also end up with a “weird, two-tier mutual”.
The deal’s terms undermine the very point of mutuality, which is “that everyone is in it together”, says Simon English in the Evening Standard. What’s more, Nationwide is overpaying for a firm worth nowhere the £2.9bn it is offering. So, for all the rhetoric about the deal being a “continuation of its mutual principles”, the reality is that it is “a massive bet on an expansion plan absolutely no one was asking for”. With a future writedown “inevitable”, the only winners will be deal advisors JP Morgan, Goldman Sachs and UBS, as well as Richard Branson, whose Virgin Group will get £414m.