Northern Rock sold to Virgin Money

chucknorris

Graham_Devon wrote: »

Not sure what to make of it at the moment.

It's probably better that Virgin bought it as if one of the other bidders had, it probably would have lead to some consolidation where they closed some branches down. At least with Virgin they are likley to keep more (if not all, they may even expand of course) of the branches open.

Generali

The Government have managed to sell Northern Rock, probably the squeakiest, cleaniest bank in Europe right now for about 2/3rds of 'book value', ie about 2/3rds of the net value of its assets less its liabilities as accounted for on its balance sheet.

Applying the same measure, that would make Lloyds worth about 43p a share and RBS worth about 35p a share. The average prices paid by the Government for the shares were 71p and 51p respectively (link) plus of course the cost of borrowing the £66,000,000,000 for 3 years and counting which would be £4,950,000,000 so far (using the 10 year Gilt yield of 2.5%, in reality the Government has probably paid more than that to borrow the money on your behalf). To regain the share cost, interest paid and to recoup inflation too will never happen.

michaels

Not wishing to call the market as wrong, if a bank is worth less than its book value it suggests that going forward standard banking activities lose money rather than making it (I assume the bit of NR being sold just does 'normal' banking) and/or that the 'assets are likely to be worth less than book value. Given the level of concentration in the UK banking market in would seem strange that ongoing activities would be loss making so I guess there is a big asset value downside risk in the pricing?

Generali

michaels wrote: »

Not wishing to call the market as wrong, if a bank is worth less than its book value it suggests that going forward standard banking activities lose money rather than making it (I assume the bit of NR being sold just does 'normal' banking) and/or that the 'assets are likely to be worth less than book value. Given the level of concentration in the UK banking market in would seem strange that ongoing activities would be loss making so I guess there is a big asset value downside risk in the pricing?

IMHO the problem is that investors simply don't trust the asset valuations being used by banks. Banks are opaque beasts at the best of times and this is hardly the best of times.

For example, net exposure to European countries is given in the Lloyds balance sheet (link - table 13 on the Excel spreadsheet). However, the EU structured the Greek 'voluntary' default to try to ensure that Credit Default Swaps (a sort of insurance against someone that owes you money defaulting) weren't triggered. How does your net exposure work if your hedge (insurance) doesn't pay out but you have to take the loss? What about if your hedge is with the next Lehmans?

Thrugelmir

chucknorris wrote: »

It's probably better that Virgin bought it as if one of the other bidders had,

There were no other interested parties.

With BOE base rate so low currently, retail banking isn't highly profitable at the moment.

Generali

Oh and it's worth noting that slightly over a third of the purchase price (£250,000,000) is being funded from Northern Rock's own cash reserves, ie it is either going to be more risky or it will have to lend less. A further £150,000,000 is coming out of Virgin Money's reserves, again making Virgin Money less able to lend or more risky.