Nationwide Building Society has booked a larger than expected accounting gain of £2.3 billion on its acquisition of Virgin Money UK, while reporting a 24 per cent slide in underlying interim profits.
Britain’s biggest mutual with 16 million customers said the gain on acquisition was because the £2.8 billion purchase price for Virgin was at a large discount to its book value and its fair-value assessment of Virgin’s assets.
Underlying profits at Nationwide fell to £959 million in the six months to 30 September as the society passed on higher than average savings rates to its customers and because of the timing effect of base rate changes.
Member benefits — a calculation of how much is passed on to members in better than average savings and mortgage rates and other perks — rose from £885 million to £950 million.
Debbie Crosbie, chief executive, indicated that the society was on track to pay its so-called Fairer Share Payment to core customers again next year. This amounted to £100 payouts for3.85 million members last time.
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She hailed record half-year net new lending of £6 billion and record new depositor balances of £8.3 billion as evidence of Nationwide’s strong showing and said the profit on the Virgin deal gave it the headroom to cover the integration costs and fresh investment in customer service.
She announced 500 new jobs in call centres and business support arrangements to help cement Virgin into the wider group.
Even with the accounting profit, however, Nationwide’s core capital ratio has fallen sharply from 28.4 per cent to 19.6 per cent as it shoulders more risk-weighted assets from the deal.
Nationwide surprised the mutual sector when it announced its cash bid for Virgin earlier this year, a deal that has made it the second biggest mortgage provider and pushed it deeper into credit cards and business banking.
It now says it is the second biggest retail bank in the UK. “We now have a connection with one in three people in the UK,” Crosbie said.
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She said the society’s controversial advertising campaign, which features a venal and arrogant high street bank boss played by Dominic West, was achieving “cut-through with young people” and helped win the bank a record 39,000 new student current accounts, up from 14,700 last time.
Nationwide was forced to change the wording of the adverts after a complaint to the Advertising Standards Authority from Santander but has carried on the campaign.
Credit quality was good, with a tiny £7 million set aside for future defaults, down from £54 million last time. The closely watched net interest margin — the difference between average lending rates and average deposit rates — widened to 1.5 per cent from 1.46 per cent but was down on the full-year number of 1.66 per cent.
John Cronin, analyst at SeaPoint Insights, said the Virgin accounting gain was the standout feature of the results: “It is much higher than had been expected when the deal was first announced and reflects positive fair value adjustments at acquisition, as well as some tangible equity build at Virgin Money UK since the deal was first announced.”
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