Britain has agreed to sell nationalized lender Northern Rock to Virgin Money, the banking arm of Richard Branson’s Virgin empire, in a loss-making deal that marks the start of the government’s exit from banks it bailed out in the 2008 crisis.
The disposal will fetch between £747-million ($1.17-billion U.S.) and £1-billion, the finance ministry said on Thursday, representing a £400-million loss on the £1.4-billion in equity pumped into the lender by taxpayers.
“The sale of Northern Rock to Virgin Money is an important first step in getting the taxpayer out of the business of owning banks,” Chancellor George Osborne said in a statement.
Virgin Money, also backed by Texan private equity tycoon Wilbur Ross, had faced competition to buy Northern Rock from NBNK, an investment vehicle set up to create a new retail bank by buying assets from bailed-out incumbents.
Deputy prime minister Nick Clegg said the Virgin Money deal was the best available.
“The strong recommendation made to us was that this was the best value for taxpayers,” he told reporters.
“Of course we have an over-riding duty to provide good value to taxpayers and that’s what we sought to do through this decision.”
The Northern Rock sale was handled by the UKFI organization, which was set up to manage the state’s holdings in banks bailed out during the crisis.
The combination of Northern Rock and Virgin Money should increase competition in British retail banking, challenging the dominance of HSBC, Barclays, Lloyds Banking Group, Santander and Royal Bank of Scotland, the UK Treasury said.
Virgin Money currently offers mortgages, credit cards, savings and insurance products by telephone and over the internet to about 3 million customers in the UK. Buying Northern Rock will give the business a branch network for the first time.
Its chief executive officer Jayne-Anne Gadhia will run the enlarged lender from Northern Rock’s existing base in Newcastle, north-eastern England.
Virgin Money has pledged not to make any further compulsory redundancies from the combined bank, and to maintain Northern Rock’s existing branch network.
Northern Rock, a former mutual that used cheap wholesale credit to grow aggressively in the mortgage market, was nationalized in early 2008 after banks abruptly stopped lending to each other in the credit crisis, starving it of funding.
Prior to the government’s intervention, customers queued at Northern Rock branches to withdraw their money in the first run on a British bank in many decades, triggering a steep fall in financial markets.
The government still holds an 83-per-cent stake in RBS and 41 per cent of Lloyds, a legacy of its efforts to prop up the banking sector during the financial meltdown.