Virgin Money has made its long-awaited bow in the retail banking market, yesterday agreeing to buy Church House Trust in a deal worth nearly £50m. The agreement gives Sir Richard Branson's group a banking licence for the first time, and provides a platform for Virgin to bid for Northern Rock when the state-owned bank is eventually sold.
The move comes two years after Sir Richard offered to buy Rock after the Government was forced to take over the running of the beleaguered mortgage lender, only to see it nationalised instead. The Church House Trust deal is less ambitious: the Yeovil-based private bank has just 3,000 customers, with whom it deals on the phone, or by visiting clients' homes. The bank made profits of just £450,000 in 2008. Virgin Money, which already offers savings, credit cards and insurance policies online, will rebrand the bank.
The deal values Church House Trust at £12.3m, with Virgin adding yesterday that it will invest some £37.3m, giving the combined business a tier one capital ratio of more than 35 per cent. Sir Richard, who has long coveted a banking presence on the high street, is likely to add to Virgin Money's portfolio. "The Church House Trust business offers us a strong platform for growth," he said. "Virgin Money aims to bring simplicity to the UK banking market which has traditionally been a complex sector."
Church House Trust's conservatism attracted Virgin. The bank has never relied on wholesale markets, which until the credit crisis allowed the likes of Rock to borrow cheaply and lend to more customers seeking mortgages.
"The financial crisis has tarnished the reputation of many UK banks," said Jayne Anne Gadhia, Virgin Money's chief executive. "Virgin Money will provide a better, different form of banking to its customers, increasing competition in the sector."
Ms Gadhia claimed Virgin Money's approach to banking would benefit customers while also providing shareholders with a profit. "We see the acquisition of Church House Trust as a strong and sensible first step in delivering Virgin Money's banking ambition," she said.
A spokesman for Virgin Money refused to rule out making a renewed bid for Rock when UKFI, the body set up to manage the Government's stake in those banks that have received state bailouts, decides to sell. Rock was split in two at the start of the year: a "good" bank known as Northern Rock, which manages £19bn of savings and £10bn of quality mortgages, and Northern Rock Asset Management, where the bulk of the bank's bad debt will remain. The spokesman also declined to rule out bids for parts of Royal Bank of Scotland and Lloyds Banking Group when taxpayer's stakes in those banks are sold.
Banks such as National Australia and Brazil's Banco Itaú are also said to be circling the publicly held stakes of the UK's banks. Yet they could all be left waiting for some time. Despite rumours of potential suitors, UKFI is yet to draw up plans to sell any of its assets, though the good part of Rock is thought likely to be the first offering.
Consumer groups welcomed Virgin's entry into the banking market yesterday. "Consumers will welcome the prospect of more choice on the high street," said Which? chief executive Peter Vicary-Smith. "There's a definite appetite for switching accounts if people feel they've been badly treated by their bank."
The Government will also welcome the entry of competitors such as Virgin Money to the UK banking sector. It announced last year that it wanted to boost competition in the sector and that it would use its stakes in banks bailed out following the credit crunch with that aim in mind.