Northern Rock

Virgin has Rock ‘building society’ plan
By Peter Thal Larsen and Jane Croft

Published: October 16 2007 22:04 | Last updated: October 16 2007 22:04

Virgin plans to make Northern Rock “much more like a building society” and cut back its lending business if the consortium led by Sir Richard Branson wins control of the troubled lender.

Jayne-Anne Gadhia, the Virgin Money chief executive who would take charge of Northern Rock if the bid was successful, told the Financial Times she would rebuild Northern Rock’s deposit base by expanding its range of online savings accounts and improving the profitability of its mortgage book.

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This would make Northern Rock less dependent on funding from the wholesale markets. “Our plan doesn’t try to grow mortgage assets, it attempts to grow mortgage margin,” she said.

Ms Gadhia added that Virgin would aim to keep most of Northern Rock’s staff, but that the “vast majority” of its executive team would have to be replaced.

Her comments came as Northern Rock executives faced criticism from MPs for expanding the bank’s mortgage lending in the first half of the year before turmoil in the markets forced it to be rescued by the government last month.

John McFall, chairman of the House of Commons’ Treasury select committee, accused executives of not properly planning for closure of the wholesale funding markets. “Why are you alone in the United Kingdom in this embarrassing situation?” he asked. “You went cap in hand to Bank of England and are in a position where your bank is effectively nationalised.”

But Adam Applegarth, chief executive, said nothing could have been done to prevent the crisis and pointed the finger at the Bank of England, which refused to follow the US Federal Reserve and the European Central Bank by providing banks with cheap liquidity.

“The fundamental cause was the speed and duration, and the global nature of the liquidity freeze – heightened for us by the fact we didn’t have access to the same type of borrowing facilities available to banks in the US and from the ECB,” he said.

Virgin is leading a consortium of international investors planning to inject up to £1bn into Northern Rock in return for a controlling stake. The group is in talks with banks about refinancing Northern Rock’s liabilities, including £13bn it has borrowed from the Bank of England.

Virgin faces competition from JC Flowers, the US private equity group, and Cerberus, the US distressed debt investor.