Northern Rock will be sold to Virgin Money for an initial £747m, at an estimated loss of over £400m to the taxpayer. But the government insists it was the best deal on the table.
The bank was taken over by the government in 2008 after it got into financial difficulty and was at risk of going under. Shares of the bank were transferred into temporary public ownership.
Northern Rock was split in two in 2010: Northern Rock plc and Northern Rock (Asset Management), which absorbed all of the bank’s debt. Virgin is buying Northern Rock plc.
Chancellor George Osborne insisted the deal was the best available for the taxpayer and would ensure a “powerful new presence” in high street banking.
Mark Hoban MP, the Financial Secretary to the Treasury, told Channel 4 News that the sale was good news for a business that had been “labouring under uncertainty for the last four years”, adding that the government wanted to normalise the banking system and this “was a start to that.”
However the sale leaves the taxpayer with a loss of between £400m and £650m, as an estimated £1.4bn was injected into the bank when it was nationalised.
The government isn’t designed to run a business. If the markets were better, they would have sold Lloyds and RBS too. Richard Hunter, Hargreaves Lansdown
In addition, the government still owns the “bad” half of Northern Rock, which is now part of the state agency, UK Financial Investments, and encompasses Northern Rock’s old mortgages and unsecured loans. According to the National Audit Office accounts from March this year, the government has put £21.59m into Northern Rock (Asset Management) so far.
Despite the loss to the taxpayer, Richard Hunter, head of equities at Hargreaves Lansdown, told Channel 4 News it seemed a “reasonable price for all concerned”.
It is in the government’s best interests not to own shares in the banks, said Mr Hunter, adding “The government isn’t designed to run a business. If the markets were better, they would have sold Lloyds TSB and RBS too.”
Northern Bank currently employs 2,100 people and has 75 branches. From January, the Northern Rock shop fronts will be replaced by Virgin Money on the high street.
Virgin Money has no high street branches, but offers services such as credit cards, insurances and investment, whereas Northern Rock has concentrated on savings, mortgages and current accounts. Virgin Money plans to merge these services for its customers. “The great thing about this business combination is that the two businesses lock together very well,” said Virgin Money chief executive Jayne-Anne Gadhia.
In taking over the bank, Virgin Money has promised no compulsory redundancies and will make Newcastle its operational HQ. Virgin Money, which was founded in 1995 and has three million customers, bid to buy the bank in 2007 following its collapse.
The acquisition, upon completion on 1 January 2012, will include:
– 75 Northern Rock branches
– One million customers
– £14bn mortgage book
– £16bn retail deposit book
– 2,100 employees.
While unions in the north east welcomed the news to move the banks’ headquarters to Newcastle, Robin Ashby, founder of the Northern Rock Small Shareholders Group told Channel 4 News that the sale marked a lost opportunity for the bank.
The price is more about the chancellor making “a political statement about government getting out of the banking business than a fair deal for all,” he said.
“And even at that price it should be remembered that it’s based on having expropriated our shares – something that didn’t happen to RBS or Lloyds.”
Northern Rock, which has a history of financing homes in the north east, will be “swept away and replaced by one which has been used for cola, wedding dresses and a plethora of unsuccessful business activities,” Mr Ashby added. “It’s a sad day for all of us in the north east of England.”
A statement from the Treasury said the sale was part of the government’s wider strategy for the banking sector, with safer ring-fenced banks and more competition for customers. Metro Bank became the first new high street bank for 10 years, when it launched in July 2010.
More choice should improve competition for customers. But in the current climate, Virgin Money might find it difficult initially, said Mr Hunter.
“What Virgin won’t have, is the size and stature of some of the other banks, and not so much exposure to corporate business and companies outside of the UK,” he said. “But their general ‘feelgood’ factor is probably among the highest for comparable brands, which could work in their favour.”
Chancellor George Osborne said that the sale to Virgin money is “an important first step in getting the British taxpayer out of the business of owning banks”.
He added: “It represents value for money, will increase choice on the high street for customers and safeguards jobs in the north east.”