Shore Capital analyst Gary Greenwood says: “You have got subscale operators that are struggling to earn a decent return. So it’s a combination of valuation and trying to improve the profitability of the subscale business.”
Other challenger banks such as Metro Bank have often been flagged as possible takeover targets, with Lloyds and Shawbrook named as possible suitors.
Specialist lenders saw their share prices jump on the back of the Virgin Money takeover announcement on Thursday, with OSB Group and Close Brothers both rising.
The deal gives Nationwide huge firepower to compete against the UK’s big banks, especially on mortgages where Virgin Money will add a £57bn portfolio.
The deal will allow Nationwide to leapfrog Natwest to become the UK’s second largest provider of mortgages and savings behind Lloyds.
In total, Nationwide and Virgin Money will have a 15.7pc share of the mortgage market versus 12.7pc for Natwest, according to RBC Capital figures. Lloyds, which owns the Halifax building society, has a 18.7pc share.
The tie-up also nudges Santander out of the top five banks by deposit base. Adding Virgin Money’s 6.6 million customers means Nationwide will usurp the Spanish lender’s position, with just over 11pc of the UK market.
Breaking into the top four will prove more difficult: Lloyd’s, Barclays, HSBC and Natwest have a near-70pc share of UK deposits.
Perhaps the way to do it will be more dealmaking.
“What it does highlight is that it’s very hard for smaller challenger banks to break into the UK banking space in a meaningful way,” Greenwood says.
Despite the push for more competition, the big six lenders — Lloyds, Nationwide, Natwest, Santander, Barclays and HSBC — still control around 80pc of the mortgage lending market.
While this may ring alarm bells, analysts at Citi say the market remains “highly competitive”, given that eight in ten home loans are sourced from mortgage brokers who can shop around to get customers the best deal.
Meanwhile, the Virgin-Nationwide deal represents something of a full circle for the ghost of Northern Rock. It will once again be a mutual.
