Nationwide 2025 results: Virgin Money drags on costs, profitability and capital
Costs related to the Virgin Money bank acquisition continue to rise at Nationwide building society. With years of integration work yet to begin, Nationwide members should be concerned. When the deal was proposed, the building society sought to placate its members (who were calling for a vote) with assurances that the deal represented “good value” and that retaining Virgin Money profits would be a better return than holding their capital at the Bank of England.
The initial signs are worrying. Profits at Virgin Money are down 80% immediately after acquisition, which means the return on capital argument made by the society was wrong. Further, the society’s capital ratio is down by one third, leaving the society financially weaker now the deal has completed, contrary to assertions made by the chairman prior to completion.
Those that were responsible for the transaction are beginning to move on. It’s unclear who will be held accountable if the early signs hold true: Virgin Money was a bad deal for Nationwide members.
More detail below.
Nationwide published its annual results today. The society’s accompanying press release draws media attention to:
- £2.8 billion of member ‘benefit’ (a topic for another day),
- Another ‘Fairer Share’ distribution for 2025 (similar to last year, £100 will be paid to a minority of members who operate a current account in a particular way alongside a saving or mortgage account), and
- A new 5% ‘exclusive’ member investment bond (max £10,000 while other savings rates offered by the society languish).
What the press release doesn’t detail however — beyond referencing “outstanding full year results” — is the actual financial results, particularly given this is the first annual results incorporating Virgin Money.
Looking deeper, it’s perhaps easy to see why. Financially, Virgin Money is a big drag on the Nationwide results when looking at the underlying basis. (The “statutory basis” inflates profitability this year due to the one-off gain on acquisition.)
On an underlying basis Virgin Money is reporting just £44 million of profit before tax for the first 6 months post acquisition. This is a terrible return for members given the £2.8 billion initial cost of acquisition, and billions more of additional spend associated with the transaction. Prior to the acquisition, Virgin Money reported Profit Before Tax of £558 million for the 12 months ending 30 Sep 2024, and £279 million for the 6 months ending 31 March 2024 (to draw a like-for-like comparison). So profits at Virgin Money are down over 80% post-acquisition.
Contrast this with the society secretary’s response to concerned members seeking a vote on the acquisition prior to deal completion:
The price agreed for the Virgin Money business represents good value and will lead to immediate financial benefits for the Society and its members.
This deal will bring a profitable shareholder-owned bank into the mutual Nationwide Building Society. In the last financial year, Virgin Money generated pre-tax profits of £345 million and announced distributions of over £270 million to shareholders. After the deal, Nationwide will be able to retain Virgin Money’s profits in the UK for the benefit of its customers and members and to provide an immediate return from the purchase.
The capital that Nationwide is using to purchase Virgin Money is currently earning just over 5% in interest from the Bank of England. Using Virgin Money’s pre-tax profits for the last financial year as an example, Nationwide would achieve a 12% return on the one-off purchase price – more than double the current return. The price agreed for Virgin Money is also at a considerable discount to its book value. That means that when we complete the deal, we expect to make an immediate and significant financial gain. This will be illustrated with our next set of financial results.
The Virgin Money profits retained by Nationwide will improve the financial strength of the Society.
Note that £44 million (£88 million annualised) vs. the initial £2.8 billion paid initially to acquire Virgin Money is less than a 3.2% return on members’ capital (which is less than the current Bank of England Base Rate at 4.25%, and inflation at 3.5%), and when other post-acquisition costs are taken into account (the total is approaching £6 billion), the return is even lower.
Nationwide continues to push the theoretical narrative that Virgin Money was a good deal because it was bought for less than book value. This disregards the practical reality that Nationwide paid a 40% premium above market value — despite no other bidders emerging. (The market valued Virgin Money at less than book value because of it’s poor profitability and the low return on capital offered to shareholders.) Nationwide has since reported that the book value of Virgin Money is even higher, recording this as a one-off gain that inflates statutory profits temporarily this year (and somewhat artificially as the increase mostly relies on an accounting treatment applied to intangible assets).
Nationwide’s Common Equity Tier 1 ratio (CET1%) has fallen by almost one third due to the acquisition: from 27.1% pre-transaction, to 19.1% of the group post-transaction. This is a key ratio that describes the building society’s financial strength, representing the amount of loss absorbing capital relative to its lending.
Contrast this with the society chairman’s 21 March 2024 letter to members — who were denied a vote on the deal — which wrongly stated that the “acquisition will strengthen Nationwide financially”. The chairman has since decided to step down from the board.