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Is Virgin Money ready to challenge the big mortgage lenders?

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Brokers are hoping that Virgin Money’s acquisition of Northern Rock will provide the platform the bank needs to challenge the big mortgage lenders.

Last week, Sir Richard Branson bought Northern Rock for £747m. This could rise to £1bn if it successfully completes an initial public offering in the next five years.

The deal brings with it Northern Rock’s 75 branches, 2,100 employees, a £14bn mortgage book, a £16bn savings book and one million customers, adding to the three million customers Virgin already has.

Virgin made way for the acquisition in January 2010, when it bought small regional private bank Church House Trust to obtain a banking licence.

Brokers are confident Virgin will now present a serious challenge to the UK’s biggest mortgage market players.

London & Country head of communications David Hollingworth (pictured) says Virgin’s launch will provide a boost to the lending market.

He says: “Virgin is not going to enter the market just to sit around, it is going to want to lend money. Northern Rock is a good vehicle for it to build a presence. It has got a good structure and good people there, coupled with an experienced management team.”

Virgin is one of the UK’s most respected brand names, with founder Sir Richard Branson rising to the top of each sector he enters, whether it be the music, airline or mobile telecoms industry.

Burwood Financial Consultants managing director Peter Suttill feels this gives Virgin an advantage over other new start-ups, such as Metro Bank or Aldermore. He says: “Virgin is an established brand and it is taking over something that is well established and has reasonable scale.”

The Virgin brand is synonymous with innovation and customer service and brokers are excited by what products the bank could bring to the market.
Capital Fortune managing director Rob Killeen says: “I anticipate some quirky new Virgin mortgage products.”

Mortgage Concepts Associates director Mike Richards says: “There are few innovative deals out there at the moment and Virgin might provide some much-needed innovation in the market.”

When the Church House deal was announced last year, Virgin declined to say what its distribution model would look like for mortgages but, following the Rock deal, it has confirmed it will distribute through intermediaries.

Hollingworth says: “Brokers are clearly a big part of Northern Rock’s proposition and the Virgin Money team has a good track record with intermediaries. If it wants a big presence, brokers are an obvious route to that.”

But Alexander Hall chief operating officer Andy Pratt says because the acquisition rebrands an existing business rather than creating a new banking entity, it will not be a massive threat to the established five.

He says: “I find it hard to picture Virgin as a really big bank. The brand has always been related to a product or a service rather than a bank so it will be difficult to transform it into a mass-market player.”

Pratt feels Branson should have launched on online-only bank to fill a gap in the market. He says: “Why do you have to have a branch someone goes into? There is room in the market for a virtual bank that generates its business through a more remote distribution channel, with intermediaries being the obvious one.”

The Building Societies Association has long lobbied for the remutualisation of Northern Rock and is disappointed by the Treasury’s decision to sell to a suitor who intends to continue operating the business as a bank.

Director general Adrian Coles says: “Denationalising this bank is a positive step but we would have welcomed Northern Rock’s return to the mutual sector after 14 years’ absence.

“Northern Rock had more than 100 years as a successful building society but only 10 years as a plc bank before the queues formed outside its branches.”
The Government pumped £1.4bn into Northern Rock, so the sale represents a potential loss of up to £650m.

Capital Economics UK economist Samuel Tombs says this could set a precedent for the sale of the Government’s stakes in Lloyds Banking Group and Royal Bank of Scotland.

Tombs says: “The unprofitable sale of Northern Rock should dent any hopes that the Government will be able to profitably sell its remaining stakes in the other nationalised banks in the near future.”

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