‘Virgin Rock’ – a new combination set to help transform high street banking? By John Gilbert

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John Gilbert, business analyst from JGFR, discusses the recent announcement of the sale of Northern Rock which is set to add to the changing face of UK banking that will accelerate next year.

While the smiling face of Richard Branson dominates media coverage of the deal, his involvement may be more indirect. The man behind the deal is Wilbur Ross, a billionaire US investor whose company WL Ross & Co is one of the world’s biggest purchasers of distressed assets. His company has been looking at Northern Rock for some 4 years and initiated a bid with Virgin Money before the former was nationalised and split up into a good and bad bank. Part of the attraction is a higher level of deposits compared to assets – highly unusual among European banks – thereby avoiding reliance on the wholesale money markets.

Last year WL Ross & Co bought a 21% stake in Virgin Money for £100 million, with a further £500 million promised to help fund the extension of a branch network.

Over time the Northern Rock brand will be lost and its 75 branches re-branded Virgin Money. Despite a customer base of a combined 4 million, few people cite either Northern Rock or Virgin Money as a main financial services provider (MFSP). Indeed the name ’ Virgin Rock’ would be more in keeping with both brands heritage and be a new, readily identifiable name on the high street and online.

Mr Ross will play an increasing role in the re-structuring of UK retail banking in the coming years. Earlier this year he was part of a consortium that saved the Bank of Ireland from full state ownership by taking a 35% stake. In the next 2 years both Virgin Money/Northern Rock and Post Office Financial services intend to offer current accounts.  Post Office Financial Services is a joint venture between the Post Office and the Bank of Ireland (UK) Ltd.

A bid by Mr Ross for the Lloyds Banking Group branches up for sale is a possibility, although the ratio of loans to deposits will be a big disincentive in the current difficult funding climate. Given the ability of Mr Ross to finesse deals at very advantageous prices the purchase of the 600 branches together with a 4.6% current account market share would make him a significant new player in UK retail banking – with a drawer full of financial services brands – and at a time of uncertainty at the top of the Lloyds Banking Group.

Currently around 9 out of 10 consumers have a designated main financial services provider, 88% of which cite one of the 10 leading bank brands as their MFSP and 65% cite the top 5 leading bank brands. Lloyds TSB and Barclays have dominated as the leading MFSPs since the quarterly survey started in March 2003.  Increasing competition in retail banking is a key desired outcome from the recent Independent Banking Commission report although to date a combination of inertia, perceived bank similarities and broad satisfaction with payment services have meant far fewer people switch current accounts – the key product to generating more valuable cross sales.

All leading MFSPs have extensive branch networks that will make the Post Office a strong challenger brand next year. Tesco Bank with its extensive network of stores is similarly well placed.

JGFR commissioned research shows some 30% of consumers are attracted to new high street bank entrants, although the key to establishing a successful challenger MFSP brand – as well as a branch network- will be gaining active consumers who may be prepared to pay for their banking services.  The autumn Financial Activity Barometer measuring consumers intended savings, investment, borrowing and debt repayment intentions, showed a near record low of 69% of consumers expect to be financially engaged. Understanding the engagement and activity levels of customers will be a key aspect in establishing a successful main financial services provider banking business in the coming years.

Read more blog posts from John Gilbert.

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Posted: November 22nd, 2011 | Author: will.armstrong | Filed under: Makes You Think | Tags: , , , , , , , , | Leave a Comment »

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