Since the financial crisis the challenger banks have flourished, moving into areas once occupied by the traditional banks, as the latter worked to rebuild their balance sheets post-2008.
Now the main banks are moving into a growth phase, making life more difficult for the challengers as they are being forced to adapt. Such is the case with Virgin Money, whose share price has been under pressure over the past year, as shareholders have struggled to see how the bank could meet the new aggression in the mortgage market.
So last week, the board agreed a takeover from CYBG, otherwise known as Clydesdale and Yorkshire Bank, in a deal that creates the sixth largest bank in the UK. The CYBG is the larger bank and so its chief executive, chairman and chief financial officer will move into the enlarged group in their respective roles while Virgin Money chief executive, Jayne-Anne Gadhia will be stepping aside, but acting as a consultant while the merger takes place.
- Virgin Money has been taken over by CYBG
- Virgin Group is to receive £15m a year from licensing its brand
- The merger may reduce the availability of mortgage products
The deal – which is subject to shareholder and regulatory approval – represents astonishing good value for Richard Branson; in exchange for his stake, the Virgin Group entrepreneur will licence the Virgin brand for £15m a year, as the enlarged group will use the Virgin name across the business.
Clearly there is a risk attached if something bad happens to the brand name under new management.
A spokeswoman for CYBG said: “Virgin customers will be migrated onto the technology platform that we have developed and on which we have spent £250m. From a migration point of view that’s over 100,000 customers that will be transferred over. It will very much be a phased approach, and we switched over 20,000 customers to our digital banking service from other providers without incident.”
The move is seen as a complementary match, with CYBG having a big presence in the small business sector, and Virgin Money in retail, and with the latter having a strong presence among the broker community – 90 per cent of its mortgages are sold through intermediaries – it is expected to create 1,500 job losses.
Shailesh Raikundlia, banking analyst at Panmure Gordon, said: “I think in terms of the potential combination, it’s been talked about for a while because they have had quite complementary product sets. Virgin Money has been very strong in the mortgage market and credit card market, and it has been increasing market share quite significantly.
“CYBG has more of a franchise in the SME market, and in deposits and current accounts. In terms of the fit it was very complementary and a good strategic rationale.”
In addition Virgin Money is quite weak in current accounts, as it has a small branch network, and it was looking to expand in that part of the market. It was also talking about setting up a digital bank, which has a lot of capital investment, but is something that CYBG has already done. Other areas of complementarity exist over branding – Virgin has a much stronger brand than Clydesdale and Yorkshire, and it is for this reason that the enlarged group is paying initially £12m a year in the first year, moving up to £15m in the fourth year, and after that 1 per cent of turnover.