Virgin Money in frame to bid for Northern Rock

THE government has taken the first steps to privatise state-owned Northern Rock three years after the stricken bank was nationalised during the financial turmoil.

• It has been three years since Northern Rock was nationalised

UK Financial Investments (UKFI), the semi-quango that monitors the British taxpayers' holdings in banks, has given corporate finance advisers a fortnight to tender for the work.

City analysts said yesterday a sale was the most likely option for Northern Rock, with Edinburgh-based Virgin Money, a fledgling financial services group founded by Sir Richard Branson, among the frontrunners to snap up the group.

Jayne-Anne Gadhia, chief executive of Virgin Money, is due to appear at the Treasury select committee this morning. She is expected to tell MPs that she believes there are significant barriers to competition in UK high street banking, particularly in current accounts.

Virgin Money has indicated it would like to open 70 branches over five years, which would be done in one swoop with a successful acquisition of the 75-branch Northern Rock.

Banking start-up NBNK Investments is also seen as a potential buyer after hiring former Northern Rock chief executive Gary Hoffman last November. However, as part of that deal NBNK committed not to bid until November 2011. Other potential names in the frame for the bank are said to be Tesco Bank and private equity firm JC Flowers.

In a statement, UKFI said it "invites expressions of interest from corporate finance advisers to work with both UKFI and Northern Rock plc in the evaluation of the strategic options for the company". UKFI said there was no presumption that any particular option would be pursued and no timeframe had been set for the return of the bank to private ownership.

Northern Rock was nationalised in February 2008 after collapsing during the credit crisis, with customers queuing round the block to withdraw their money. Its business model was championed by later-ousted chief executive Adam Applegarth - borrowing short-term funds from wholesale markets to lend to mortgage borrowers - but came unstuck during the 2007 credit crunch.

Last year it was split in two, with "good" assets such as new mortgages and savings held by Northern Rock PLC, and its "bad" assets held by Northern Rock (Asset Management).

Among investment banks expected to be interested in advising UKFI on Northern's return to the private sector are Credit Suisse and Citigroup, key advisers to the government during the crisis. Goldman Sachs, Morgan Stanley and Deutsche Bank may also tender.

Gadhia is expected to tell MPs that the UK current account market, in particular, is opaque and anti-competitive. Also appearing will be Ana Botin, the new chief executive of Santander.Botin is set to be quizzed on why Santander withdrew from Project Merlin, talks between the UK banks and government on lending levels to business and the troubled issue of bank bonuses.

Botin is expected to tell MPs that Santander, which has snapped up Abbey National, Alliance & Leicester and Bradford & Bingley in the UK, is targeting growth in UK business lending of about 20 per cent this year.