Why Nationwide will be financially weaker if the proposed takeover of Virgin Money goes ahead


A company’s balance sheet is made up of assets, liabilities and equity. In the case of Nationwide building soicety, the equity (or capital) in the business belongs to the members. 

In most takeover deals involving listed equity i.e. a company owned by shareholders that is listed on a stock exchange, there would be an estimate provided as to how dilutive the deal is going to be (i.e. how much capital is consumed) to the shareholders of the company that is making the acquisition.

In the absence of this disclosure from Nationwide, the below is an approximate estimate of the impact to member capital of the proposed combined group of Nationwide and Virgin Money. 

CET1 is the “high quality” capital that is used by regulators to determine how safe a financial organisation is, and governs how much it can lend prudently. It also has an impact on the price at which an organisation can borrow. A key metric that determines the risk within an organisation is the CET1 ratio, expressed as a percentage – which is the amount of CET1 capital divided by the amount of Risk-Weighted Assets (RWAs) held by the organisation. RWAs are a measurement of how much has been lent out.

Virgin Money reported in its 2023 annual report a Common Equity Tier 1 Capital of £3,711 million and a CET1 ratio of 14.7%.  This was above the target range, so the board have since authorised share buy backs to reduce this down (i.e. make the ratio it worse) – however this has been disregarded for ease.

3,711 / 14.7% = £25,176 million in RWAs for Virgin Money.

Nationwide reported in 2023 Common Equity Tier 1 Capital of £13,733 million and a CET1 ratio of 26.5%: 

13,733 / 26.5% = £51,731 million in RWAs for Nationwide

Adding the individual components together, the combined group will have 76,907 million in RWAs, and CET1 of £17,444 less the common equity spent on this deal (i.e. Nationwide member capital).  Deducting from the CET1 £2,900 for the acquisition plus a further £1,000 million of estimated restructuring and integration costs (e.g. Bransons £250m exit fee + licensing of the VM brand, IT spend and people rationalisation) gives the final picture.

Then we have 76,907 / (17,444 – 2,900 purchase – 1000 restructuring costs) = 17.6% CET1 ratio.

According to the Nationwide annual report, the Bank of England stipulated Solvency Stress Test (SST) pushed the Nationwide’s CET1 down to 17%.  After this deal, based on the above, this is where the combined group would be starting from. Remember that unlike a bank, a building society cannot simply raise equity – there are no shareholders. So it easy to conclude that this deal will significantly weaken the building society, impacting how much it can lend and at what price i.e. bad for members.

Why Nationwide will be financially weaker if the proposed takeover of Virgin Money goes ahead

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