Bankers, after all, were the very embodiment of the Establishment at which Branson has spent his career thumbing his nose, Bloomberg Markets reports in its May issue.
Yet here he is in front of a bank decked out in the trademark red and white of his Virgin Group Ltd. and adorned with a banner proclaiming “Our Quest to Make Banking Better Starts Here.”
And here’s Branson doing what he does best, playing the entrepreneur as celebrity icon, man as marketing Ubermensch.
As curious bystanders and ogling fans gather, he smiles for the television crews, camera lights illuminating the 61-year- old’s preternaturally white teeth and uncannily yellow mane.
In September 2007, television reporters flocked to this bank branch to record a very different scene: a classic bank run that had customers lined up for blocks to withdraw their money.
The branch was then part of Northern Rock Plc, the British bank whose reliance on short-term financing resulted in its becoming the first casualty of the global liquidity crunch.
After extending Northern Rock 27 billion pounds ($52.6 billion) in emergency loans, the government nationalized the bank in February 2008.
The Big Five
It later split the company in two. Northern Rock Plc, a so- called good bank, inherited the retail operations -- some 1 million customers, 10.3 billion pounds in mortgage loans and 19.4 billion pounds in deposits.
It was still unprofitable, however -- losing 224 million pounds in 2010. Northern Rock Asset Management Plc, the so- called bad bank, was saddled with 50 billion pounds of its predecessor’s debt.
In November, the government sold the good bank to Virgin Money Holdings U.K. Ltd., Branson’s financial services company, for 747 million pounds in cash and 150 million pounds in convertible debt.
The price Branson paid about 400 million pounds less than what the British government spent in January 2010 to bail out the bank -- leading opposition politicians to complain that the deal shortchanged taxpayers.
It may be easier to break into Buckingham Palace than to become a major force in British retail banking.
For two decades, the industry has been dominated by the Big Five: Barclays Plc (BARC), HSBC Holdings Plc (HSBA), Lloyds Banking Group Plc (LLOY), Royal Bank of Scotland Group Plc (RBS) and Santander U.K. Plc, which was Abbey National Plc until Madrid-based Banco Santander SA (SAN) purchased it in 2004.
‘Formidable Player’
They control almost 80 percent of personal checking accounts, 71 percent of mortgage lending and about 60 percent of savings accounts, according to the U.K.’s Independent Commission on Banking.
Now, the question is whether Branson can reorder British banking in the way his Virgin brand has disrupted industries from music to airlines to mobile phones.
“We will be a very formidable player,” Branson says during an interview at the former Northern Rock headquarters in the Newcastle suburb of Gosforth.
Branson’s move into banking comes as the industry faces massive regulatory changes and consolidation in the U.K. and throughout Europe.
Banks are being forced to quarantine their retail operations from their riskier investment-banking units and proprietary trading desks.
Turnaround Artist
“There is more structural change going on in the U.K. market than at any time in recent history,” says Ian Walsh, a partner in Boston Consulting Group’s financial institutions practice in London.
In his mission to revolutionize retail banking in Britain, Branson has teamed up with a veteran turnaround artist: U.S. private-equity investor Wilbur Ross.
Ross’s firm, WL Ross & Co., has invested almost 350 million pounds in Virgin Money for 45 percent of the company -- a stake roughly equal to Virgin Group’s own share in the business. “We think the potential for capturing market share from other banks is considerable,” says Ross, 74, who’s worth at least $2 billion, according to Bloomberg Billionaires.
Branson has started dozens of businesses with bold promises. Sometimes, as with Virgin Atlantic Airways Ltd., it has worked; other times, it hasn’t.
Shares of Virgin Express Holdings Plc, a short-haul European airline, lost most of their value before SN Airholding NV bought the company in 2004. And does anyone remember Virgin Cola?
Sex Pistols
With Virgin Money, Branson aims to bring change to an industry that has never been on the cutting edge.
“The two core elements of banking -- checks and branches -- have been around for more than a millennium,” says Brett King, a co-founder of Movenbank, a brand-new U.S.-based startup focused on mobile banking.
Virgin Money itself is more refurbishment than new build. In late 1994, Rowan Gormley, a venture capitalist Branson hired to brainstorm new business ideas, suggested Virgin get into financial services.
Everyone just laughed, Gormley says. Everyone except Branson. He loved the idea “that the guy who brought you the Sex Pistols could sort out your pension, too,” Branson wrote in his 1998 autobiography, Losing My Virginity (Virgin Books).
Ten weeks later, Branson created Virgin Direct, which sold low-cost index funds by mail and telephone. It later moved online and expanded into insurance and credit cards.
Virgin Money
In 2002, it changed its name to Virgin Money. By 2010, the company had 3 million customers and 2.6 billion pounds under management in its investment business.
And that year, when it first became licensed as a bank, it made a profit of 27 million pounds on revenue of 91 million pounds, according to financial filings.
Still, it didn’t have branches, and it lacked classic banking products such as checking accounts.
Virgin Money remained a small star in the firmament of Branson’s business universe, which includes at least 55 Virgin- branded companies with global revenues of 13 billion pounds in 2011, according to Virgin Group. Branson’s net worth is at least $4 billion, according to Bloomberg Billionaires.
Catapulting Branson’s bank onto the center stage of U.K. banking has been Jayne-Anne Gadhia’s goal since she became the company’s chief executive officer in March 2007.
The job represents a homecoming for the 50-year-old, 6- foot-1-inch (1.85-meter) former accountant: She helped Gormley create Virgin Direct and spent the next six years there.
Subprime Mortgages
At Virgin Direct, Gadhia pioneered a mortgage called Virgin One in partnership with Royal Bank of Scotland.
It lowered borrowers’ payments by offsetting their debt against savings. The Virgin One business had 3.75 billion pounds in loans by 2001, when RBS bought it outright for 100 million pounds.
Gadhia joined RBS, rising through the ranks until she oversaw the bank’s entire 70 billion-pound retail mortgage portfolio.
It should have been a potential springboard into RBS’s C- suite. Instead, Gadhia says, she came under pressure from her bosses to securitize subprime mortgages.
She balked and, in September 2006, called Branson. Within a week, she had an agreement to return to Virgin Money, this time as CEO.
Gadhia’s defection was well-timed.
In 2008, RBS suffered the largest-ever pre-tax loss in British corporate history: 40.7 billion pounds. Since then, the government has spent 45.5 billion pounds to bail it out.
Northern Rock
At Virgin Money, Gadhia turned her attention to another failing lender: Northern Rock. She sensed opportunity.
Buying Northern Rock would instantly give Virgin the geographical footprint and product range to vie with Britain’s biggest retail banks.
In October 2007, advised by investment bank Greenhill & Co., Gadhia put together a consortium to bid for the stricken bank. Among those Greenhill approached was Ross.
“Wilbur is a natural person to go to given his expertise in financial services and his experience investing in distressed situations,” Greenhill Managing Director Edward Wakefield says.
Ross made a name for himself as a bankruptcy specialist in the 1980s and 1990s at Rothschild Inc.
Among his famous workouts was Bank of New England Corp., whose 1991 bankruptcy was, at the time, the second-largest bank liquidation in U.S. history.
‘A Lot of Credibility’
Ross and Gadhia’s bid failed when the government decided to nationalize Northern Rock.
Although disappointed, the two stayed in touch. Ross says he was impressed that Gadhia continued to hit her profit targets throughout 2008 and 2009 despite a terrible economic environment.
“That built up a lot of credibility in our minds about Virgin management,” Ross says.
In 2010, he invested 96.5 million pounds in Virgin Money, acquiring a 21 percent stake. He also promised up to 500 million pounds more to support an acquisition.
Since 2008, Ross has pursued a contrarian strategy of investing in flattened lenders.
He has spent $1.8 billion on bank acquisitions, mostly buying regional U.S. lenders, although he also put $400 million into a $1.6 billion effort to recapitalize Bank of Ireland Plc in July 2011. Through March 23, the bank’s shares rose more than 27 percent on the Irish Stock Exchange.
‘A Bad Deal’
When the British government put Northern Rock back on the market last summer, Gadhia and Ross pounced. In the end, Ross contributed 250 million pounds to the purchase, giving him control of almost half of Virgin Money.
The Labour Party, which had been in power when Northern Rock was nationalized, immediately attacked the sale. Officials had spent 1.4 billion pounds to recapitalize the bank in January 2010. Now, the current government, headed by the Conservative Party in coalition with the Liberal Democrats, was getting back at most 910 million pounds in cash -- and that will only be realized if Virgin Money goes public or is sold within five years.
“This is a bad deal for the taxpayer,” says Chris Leslie, Labour’s shadow Treasury spokesman.
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