It was a nice idea while it lasted. So-called challenger banks, it was fondly imagined, would emerge after the 2008-09 financial crash and show the UK’s big four banks how the industry should be run. Their weapons would be new technology, superior service and brand names unsullied by bonuses and bailouts.
More than a decade later, market shares in the industry haven’t shifted meaningfully, and here comes the latest example of a challenger bank finding the independent life to be challenging. Virgin Money – a combo with the former Clydesdale and Yorkshire banks via a 2018 deal – is provisionally minded to agree to a £2.9bn takeover by the Nationwide Building Society.
The fact that the buyer is Nationwide means this isn’t a surrender to one of the big four (which probably wouldn’t be allowed to buy anyway); Nationwide sits in the industry’s second tier and so can be viewed as a different type of challenger. But it is a far cry from 2018, when the Virgin crew were talking about creating “the UK’s leading challenger bank” to offer “a genuine alternative to the large incumbent banks”. Now the rhetoric is about selling “to complete our journey” as a national competitor.
Virgin’s shareholders will get a 40% takeover premium, which sounds handsome, but also reflects how the shares had drifted sideways or lower for five years. At the offer price of 220p, the terms are well short of Virgin’s last tangible book value of 360p. Shore Capital’s analyst thinks “management could have perhaps driven a harder bargain”.
The uncomfortable truth, though, is that size remains an enormous advantage in retail banking, in terms of everything from funding costs to investment in new tech and whizzy apps. Assistance for challengers from regulators never really materialised. Given that the last trading news from Virgin was higher-than-expected arrears in credit cards, there is a certain commercial logic in selling to Nationwide now. There are few other candidates for a deal and opportunities don’t always knock twice.
For Nationwide, the commercial rationale is reasonable. The society will become a clear No 2 in UK mortgages (behind Lloyds Banking Group) and gets a proper entry into business banking, thanks to the Yorkshire and Clydesdale heritage within Virgin. Post-deal assets of £366bn, total lending and advances of £283bn and 23 million customers are chunky figures. On the other hand, there will be few quick cost savings since the Virgin operations will be run as a separate entity for a few years. That’s one luxury of not being a plc: you can take your time on integration.
Another luxury, it seems, is that you don’t have to ask your owners for approval. Nationwide’s members will not get to vote on how almost £3bn of capital will be spent, which hardly seems true to the democratic principles of the building society movement. The chief executive, Debbie Crosbie, a former long-serving Clydesdale banker, had better be correct that this deal makes long-term sense.