In the aftermath of the collapse of both Silicon Valley Bank and First Republic in the US last year, many in the industry predicted a wave of consolidation within mid-tier lenders.
On the eve of the first anniversary of the run on SVB that led to its demise, that consolidation is coming to the UK.
This week, the UK’s largest building society, Nationwide Building Society, reached a preliminary agreement with Virgin Money to potentially acquire the bank for £2.9bn in cash.
According to a spokesperson for Nationwide, key terms are 218 pence per Virgin Money share and a proposed dividend of two pence per share. The total value of 220 pence per share represents a premium of 38 per cent on Virgin Money’s undisturbed share price as of March 6 2024.
Nationwide would remain a building society but plans on including what it describes as the “the well-established business banking services provided by Virgin Money” to its customer base.
The spokesperson said this combination will “increase Nationwide’s scale and financial strength, putting it in a stronger position to continue to provide ‘fairer share payments’ to eligible Nationwide members, and offer rates for mortgages and savings that are, on average, better than the market average.”
Once completed, Nationwide would combine its 17mn customers with 6.6mn of Virgin Money’s. It would also take over Virgin Money’s 91 branches, resulting in 696 in total, second only in the UK to Lloyds Banking Group. It would become the country‘s second-largest mortgage and savings group by market share.
Debbie Crosbie, chief executive officer of Nationwide, said the lender will continue its “commitment to retain existing branches” as part of its “branch promise”. Interestingly, Crosbie served as chief operating officer at Clydesdale & Yorkshire Banks (CYBG) when that firm bought Virgin Money in 2018 for £1.7bn. She was also that group’s executive director when CYBG rebranded as Virgin Money publicly.
Although both are mid-tier banks in global terms, both Nationwide and Virgin Money are two of the eight major UK firms assessed by the Bank of England in preparation for resolution under the Resolvability Assessment Framework.
In 2022, the BoE found that all eight UK banks could enter resolution safely, which means “remaining open and continuing to provide vital banking services to the economy”. The remaining six banks are Barclays, HSBC, Lloyds Banking Group, NatWest, Santander UK, and Standard Chartered.
Douglas Grant, managing director at UK-based Conister Bank, said this deal could spell more consolidation in the UK banking sector.
“With the stock market continuing to undervalue banks and share buybacks not necessarily creating the share price movement the bank expected, using their spare capital on accretive acquisitions makes sense. So this might be the time for consolidation in the industry.
“We have seen in the last few years these middle-tier banks finding themselves in quite a bit of financial trouble trying to compete with the [major high street banks], whether it’s here in the UK [The Co-operative Bank] or in the US [Silicon Valley Bank, Signature Bank and First Republic Bank],” he said.
However, these mid-tier banks need to exercise caution if they aspire to rival bigger banks in the UK, said Grant.
“The prospect of heightened regulatory scrutiny and stronger opposition from the [major high street banks] could pose challenges, particularly concerning the utilisation of their clearing licence or engaging in price competition, especially if the middle-tier banks lack a clearing licence,” he added.
Last year, Virgin Money CEO David Duffy was quoted in the Irish Times as saying: “We want to be the best digital bank in the UK. That’s not an idle statement. We want to be like a fintech that grew up and became incredibly successful, and also had all the products.” However, the bank's underlying pre-tax profit fell 24 per cent to £593mn in 2023, against forecasts of £625mn.
Brendan Gilmore, managing director at BPG Strategy, who worked with Virgin Money to develop a digital small to medium-sized enterprise proposition in 2018, says the deal “gives Nationwide access to skills and a presence in cards and SME banking that it doesn’t currently have — and increases mortgages which it does — so it makes sense on a number of fronts”.
However, he warned: “The challenge, as ever, is ensuring they can successfully integrate and deliver value from Virgin Money, which itself is a combination of the culture and operations of Virgin, Clydesdale and Yorkshire.”
Some in the industry have pointed to this potential deal as a blow to the “Big Five” British high street banks. However, Gilmore was not so sure.
“Virgin Money did seem to be the leader of the pack in terms of full-service challenger banks that could potentially lay a glove on the Big Five, so I wonder if this move is evidence that it’s an unachievable task — and if it will spark more consolidation across the industry,” he said.
Alessandro Hatami, founder at Pacemakers and former director and chief operating officer for Group Digital at Lloyds, is also cautious about the deal.
“[Virgin Money’s CEO] declared that they were trying to build the UK’s best digital bank. This will inevitably result in closing branches and laying off of staff — potentially painful for a public firm,” he said. “Nationwide has struggled in building a successful digital bank, so this acquisition will lead to a badly needed injection of know-how and capability in that sector.”
However, Hatami said he feels that from a UK market perspective, this acquisition reduces competition in the UK market and will inevitably lead to closures of branches and lay-offs for both brands, as well as less competition in the banking sector, especially in mortgages.
“Less competition means less choice for customers. This acquisition could also increase digital resilience risks. As the two banks harmonise their delivery post-merger, they are likely to merge their tech capabilities, potentially impacting the tech resilience of the UK banking sector,” he said.
Ultimately, Hatami said, this is not a “win-win for all”, despite Nationwide chair Kevin Perry claiming this “combined group would deliver the benefits of fairer banking and mutual ownership to more people in the UK”.
The Nationwide/Virgin Money deal will provide better financials for both banks and “happy Virgin Money shareholders”, but could also “lead to cost cuts and lay-offs for both banks’ staff, less competitions in the markets, less choice for customers and increased resilience risk in the UK banking sector”, he added.
