Nationwide books £2.3bn gain on Virgin Money UK acquisition

Nationwide Building Society has booked a larger than expected accounting gain of £2.3 billion on its acquisition of Virgin Money UK, while reporting a 24 per cent slide in underlying interim profits.
Britain’s biggest mutual with 16 million customers said the gain on acquisition was because the £2.8 billion purchase price for Virgin was at a large discount to its book value and its fair-value assessment of Virgin’s assets.
Underlying profits at Nationwide fell to £959 million in the six months to September 30 as the society passed on higher than average savings rates to its customers and because of the timing effect of base rate changes.
• Nationwide to buy Virgin Money for £2.9bn
Member benefits — a calculation of how much is passed on to members in better than average savings and mortgage rates and other perks — rose from £885 million to £950 million.
Debbie Crosbie, the chief executive, indicated that the society was on track to pay its so-called Fairer Share payment to core customers again next year. This amounted to £100 payouts for 3.85 million members last time.
She hailed record half-year net new lending of £6 billion and record new depositor balances of £8.3 billion as evidence of Nationwide’s strong showing and said the profit on the Virgin deal gave it the headroom to cover the integration costs and fresh investment in customer service.
She announced 500 new jobs in call centres and business support arrangements to help cement Virgin into the wider group.
Even with the accounting profit, however, Nationwide’s core capital ratio has fallen sharply from 28.4 per cent to 19.6 per cent as it shoulders more risk-weighted assets from the deal.
Nationwide surprised the mutual sector when it announced its cash bid for Virgin earlier this year, a deal that has made it the second biggest mortgage provider and pushed it deeper into credit cards and business banking.
It now says it is the second biggest retail bank in the UK. “We now have a connection with one in three people in the UK,” Crosbie said.
She said the society’s controversial advertising campaign, which features a venal and arrogant high street bank boss played by Dominic West, was achieving “cut-through with young customers” and helped win the bank a record 39,000 new student current accounts, up from 14,700 last time.
Nationwide was forced to change the wording of the adverts after a complaint to the Advertising Standards Authority from Santander but has carried on the campaign.
Credit quality was good, with a tiny £7 million set aside for future defaults, down from £54 million last time. The closely watched net interest margin — the difference between average lending rates and average deposit rates — widened to 1.5 per cent from 1.46 per cent but was down on the full-year number of 1.66 per cent.
John Cronin, an analyst at Seapoint Insights, said the Virgin accounting gain was the standout feature of the results: “It is much higher than had been expected when the deal was first announced and reflects positive fair value adjustments at acquisition, as well as some tangible equity build at Virgin Money UK since the deal was first announced.”
A surge in applications from students for accounts with Nationwide has been partly attributed to the bank-bashing advertising campaign fronted by Dominic West and social media campaigning of the celebrity GK Barry.
New student account openings almost tripled from 14,700 last time to 39,000 in the six months to September, with Nationwide now claiming a 30 per cent share of the new student accounts market.
“We are getting cut-through with younger customers,” Crosbie said. The controversial advertising campaign, with West playing an arrogant high street banker with shareholders to please, had “surpassed all our expectations”.
She also attributed the surge in numbers to Barry, a TikTok influencer who appeared on ITV’s Love Island and is currently a contestant on another of the broadcaster’s reality programmes I’m A Celebrity …Get Me Out of Here! She fronts a social media campaign for Nationwide.
The building society is also wooing students with offers of a £100 cashback and free Just Eat food vouchers worth £120, challenging rival banks like Santander, which offers free 16-25 Railcards and other banks which routinely offer cashback and free overdrafts. Banks compete aggressively for students in the hope of turning them into lifetime customers who buy other products.
Nationwide was forced to reword its cinema and TV ads campaign after a complaint to the Advertising Standards Authority by rival Santander about its claim not to close branches, but is still pushing ahead with similar ads.
The latest portrays the West character being teased by his daughter, who has just opened an account with the mutually owned Nationwide. “It’s gone down very well with young people,” Crosbie said, and it scored very highly for spontaneous awareness, she added.
Crosbie, a former bank boss herself after running TSB, has come under fire from some both for her growing pay package and her decision not to put the Virgin Money UK acquisition to Nationwide members.
She was paid £2.41 million last year and the Nationwide at its last annual meeting received approval from members to lift her maximum possible bonus from £1.14 million to £3.42 million.
She has argued there was very little member concern about the Virgin deal with fewer than 200 members writing to demand a vote, while takeover rules raised practical difficulties with a vote. “My job is to make decisions in the best interests of members,” she said.