Statement by the Financial Secretary to the Treasury.
[Check against delivery]
Mr Speaker, I would like to make a statement.
As the House will be aware, on the 15 June this year, the Chancellor announced that Northern Rock was being put up for sale. Last week, on the 17 November, the Chancellor announced that he had agreed to the sale of Northern Rock Plc to Virgin Money.
I am grateful for the chance to update Parliament on these events.
As the Honourable Members are well aware, the collapse of Northern Rock four years ago foreshadowed a crisis that was to engulf the global financial system.
The queues of people outside branches of Northern Rock - the first run on a British bank in more than a century - remain to this day a lasting image of the crisis.
The sale of Northern Rock to Virgin Money is an important step towards normalising the Government’s role in the financial sector. Getting the Government out of the business of running the banks.
The deal with Virgin Money is expected to be completed on 1 January 2012, pending European Commission merger clearance and Financial Services Authority approval.
But let me reassure the House that the sale route represents the best value for money for the taxpayer.
UKFI and its advisers have looked exhaustively at all potential exits, including standalone re-mutualisation, combination with an existing mutual, and Initial Public Offering, but ultimately advised that a sale would generate the best value for money for the taxpayer.
Furthermore, under the terms of the State aid agreement entered into by the previous Government, we have to transfer control of Northern Rock to a new owner by the end of 2013. This limits the window of getting Northern Rock plc back into the private sector.
This, combined with the fact that the bank is likely to be loss-making well into 2012, means a sale to Virgin Money now is the best option measured against taxpayer value for money. We have also carefully assessed the impact on competition and financial stability.
Facts of the deal
Mr Speaker, let me set out the facts of the deal.
The financial elements of the deal are as follows: Virgin will make a cash payment of £747 million to HM Treasury on completion, which is expected to be January 1st, conditional on regulatory approvals.
We also expect around a further £50 million once we know the actual final net asset value of Northern Rock plc at the end of 2011. In addition to the cash payment, the Government will hold a capital instrument in Virgin Money with a par value of £150 million and which bears a coupon of 10.5%.
Furthermore, we have made sure that the taxpayer gets a share of any upside: in the event of a profitable sale or Initial Public Offering by Virgin Money, an additional cash consideration of £50-80 million will be paid to the Government.
By way of comparison, our shareholding in Northern Rock plc is valued at £1.2 billion on the Treasury’s balance sheet. This is because the previous Government injected £1.4 billion into the loss-making bank at the start of 2010.
By the end of this year, this value will have decreased further due to the losses Northern Rock plc currently makes.
Despite all this, we will have sold Northern Rock plc at a price to book multiple of around 0.8. Given that other UK banking stocks are trading at multiples of around 0.5, this is a good outcome for the taxpayer.
Of course we will need to look at both Northern Rock Asset Management (NRAM) and Northern Rock plc to look at the final outcome for the taxpayer.
North East economy
This is also a good deal for the economy of the North East with the potential to create new growth and new jobs in the area.
Virgin Money have committed to no further compulsory redundancies beyond those already announced for at least three years. They will also make Newcastle the operational headquarters of the new, combined business.
And they will retain the total number of existing branches, with the highest concentration in the North East, with plans to expand as the business grows.
We are pleased that Virgin Money has committed to extending the current financial agreement with the Northern Rock Foundation to the end of 2013.
The Northern Rock Foundation plays a vital role in the North East and Cumbria to tackle disadvantage.
Virgin has also committed to exploring how Virgin Giving and the Foundation could work together in the future.
This deal will also create almost immediately a new credible competitor in our retail banking sector, thus increasing choice for consumers. The Government is clear that more competition is needed in banking.
A competitive banking sector ensures that the economy benefits from banking products and services at efficient prices. Competition is also a spur to innovation and economic growth.
But choice has diminished in recent years as a number of high street banks and building societies have disappeared or merged.
As set out in this Government’s coalition agreement, we are committed to promoting competition in the banking sector and the return to the private sector of Government held stakes is a key part of this.
The Virgin brand has a strong reputation for growth and innovation and I am confident that their entry into retail banking will provide a real challenge and improve diversity in the banking sector.
I want to be clear that for current Northern Rock customers, it is business as usual and they will not need to take any action as a result of the announcement. Virgin Money also plans to offer Personal Current Accounts and small business banking products in due course.
I know some would have liked to see Northern Rock re-mutualised. But no final bids were made by mutuals and no workable plans for standalone mutualisation were put forward.
Nonetheless, the Government remains committed to promoting mutuals which is why we are working with the sector to support its ambitions and ensure the mutual sector is not disadvantaged compared to the bigger established banks.
All to foster diversity and create a more competitive banking industry.
Of course, the sale of Northern Rock is only one step to a new banking sector. The sale of Northern Rock is not simply a return to business as usual.
The last crisis cost the taxpayer billions of pounds, and that is a situation we cannot repeat.
That is why this Government is pursuing ambitious reform of the financial sector at home and abroad.
Ensuring that we embed a competitive, successful but secure financial sector … one that supports growth across the entire economy without jeopardising its stability.
It’s why we are fundamentally reforming the failed tripartite system, entrenching a much greater and much needed focus on macro and system level risks.
It’s why we are leading the international agenda for full implementation of the Basel III standards to ensure that our banks are resilient to ongoing market turbulence.
It’s why we support in principle the recommendations of the Independent Commission on Banking to ring fence better capitalised high street banks, reduce taxpayer exposure through powers of bail in, and increase competition in banking.
And it’s why we have secured commitments from the UK’s biggest banks to provide £190 billion of new credit to businesses across the country this year.
Lending £76 billion to SMEs this year alone, £10 billion more than last year.
Mr Speaker, the sale of Northern Rock to Virgin Money is an important milestone in this Government’s efforts to return state-owned banks to the private sector,
It’s a sale that represents good value for the taxpayer, and provides an economic boost to the North East region.
And for consumers across the board it means greater diversity and choice in financial services.
I firmly believe that Virgin Money will have a hugely beneficial impact on the banking landscape in the years to come - providing better outcomes for customers and businesses.
Of course, this is only one step towards a reformed banking landscape.
The Government will continue to work hard to remedy the regulatory failures of the last decade, to promote a more competitive sector, and ensure that we embed a stable and successful financial system that serves not jeopardises the economy.