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The writer is the author of several books on the City and Wall Street
“We’re not a . . . bank” says Nationwide’s website. “In that case, why are you considering buying one?” the mutual’s members might ask as the UK’s biggest building society weighs up an agreed offer for the challenger bank Virgin Money. Except that they will not have the opportunity formally to do that unless 500 qualified members band together, each stumping up a required £50, to call a special meeting of Nationwide. Under the 1986 Building Societies Act, the board apparently doesn’t have to seek members’ permission for the deal.
The Virgin deal would increase Nationwide’s size by about a third but the enlarged business would still meet the act’s definition of an organisation principally making loans secured on residential property, substantially funded by members.
With no intention to convert to a public listed company, there is no requirement to consult Nationwide’s 3.7mn committed members. The board has a free hand with only the regulators to keep them in check. For such a significant deal, this looks like a glaring gap in the membership model.
Nationwide is an exceptionally good bank — sorry, building society. Unlike many other building societies — 10 converted to banks between 1989 and 2000, none survive in their original form — a majority of its members voted against demutualisation in 1997. Through shrewd management, including smaller acquisitions, it has become the world’s largest building society with 17mn customers. It is the UK’s third-largest mortgage provider and has a 10 per cent share of current and deposit account banking. It leads its peer group in customer satisfaction by a wide margin and has done so for 11 years. Its returns are broadly similar to those of UK consumer banks. It is a model of community engagement and responsible banking. It ticks all the right ESG boxes. It stayed out of trouble in 2008 and has mainly steered clear of regulatory fines, compensation and reputational damage.
It has the kind of reputation that the big consumer banks wish they had — but Nationwide has not reached its current position by standing still. It is committed to branch banking but customers can also use Nationwide’s mobile app. It uses sophisticated risk management including interest rate hedging. It uses wholesale markets to fund the business but not excessively so. It levers the balance sheet but only modestly. Its capital ratios are robust and in the last six-month period for which it reported, it says it delivered £885mn to customers through better pricing and incentives and £344mn to committed members through a direct distribution.
Frankly, it is doing fine and no one is complaining. It does not need to do anything. So why is Nationwide considering taking over a challenger bank with a chequered ownership history, born out of the merger of three previously struggling challenger banks, Yorkshire, Clydesdale and Virgin?
The case for the acquisition has so far been made in a joint statement by Nationwide and Virgin Money, businesses the boards believe to be “complementary”. The latter’s shareholders, including Richard Branson’s Virgin Group whose fee for using the Virgin brand will run on for four years, will get a 40 per cent premium to the average pre-bid share price if it proceeds. They will also get a chance to consider the full case in an offer document and vote on it.
Nationwide members, meanwhile, must rely on the board’s belief that the addition of Virgin’s business deposits would increase the diversity of funding and that greater scale in core lending and deposit markets would generate improved returns. These would be passed on to customers through better pricing and to committed members through a bigger distribution.
There are merits in this argument but the gains look marginal and it is not a risk-free proposition. The joint statement outlines an integration plan for the Virgin brand, branch network and workforce, parts of which cover a six-year period. It is complicated. Running the two brands in parallel with separate legal entities, boards and banking licences over the medium term is bound to be a management distraction. Integrating two IT systems and two risk management strategies looks particularly complex.
It is a big challenge for Debbie Crosbie, Nationwide’s relatively new chief executive who previously worked for David Duffy, now Virgin’s boss. Academic studies show that most big mergers fail to create value for acquiring shareholders and under the circumstances, the building society’s members should be offered the opportunity to approve a deal. From such a strong starting position, Nationwide, and indeed the whole mutual model, have a lot to lose.