Virgin Money on the ropes

VIRGIN MONEY FACES an uncertain future in the South African market. The domestic joint venture between Absa and Richard Branson's Virgin Group has failed to deliver on its projections and will be reviewed within 18 months - at which point it must either justify its existence or face possible closure.

"Our expectations of Virgin Money haven't been met," says Doug Walker, head of Absa's card division. "Virgin Money hasn't penetrated as deeply or as broadly as we expected it would." Absa is Virgin's 50:50 partner and stumped up half the capital for the venture. It's yet to see a return on its investment.

Virgin Money MD Vinay Padayachee concedes new business levels are about a third of what they were a year ago. The consumer cycle has turned negative, borrowing is sharply lower and bad debts are rising. Virgin Money's loan book has grown only marginally this year, to around R1,3bn on cards and a modest R500m on mortgages.

Significant growth over the short term is unlikely, with the focus very much on managing debtors: 74% of new applicants for Virgin Money credit cards are rejected as it seeks to avoid risk.

"Our problem is that we're the second or the third card in consumers' wallets. What happens when times get tough? You service your most precious debt first," Padayachee says. Like other ventures before it Virgin Money is constrained by its inability to provide a one-stop banking solution. However, not even Go Banking, which did provide a full suite of banking products, was able to generate sufficient interest to be sustainable.

"South Africans are very loyal to their banks," says Padayachee, who joined Virgin Money from Absa after the departure earlier this year of founder MD John Maxwell.

The operation is considerably smaller than early projections had implied. It has 176 000 clients signed up to its credit card offering, just 140 000 of those being classed as active consumers while fewer than 400 individuals have taken up its mortgage product since it was launched 10 months ago. The unit had planned to have 130 000 cards in the domestic market by the end of year one - and 500 000 by year five. It's unlikely to reach the latter target within the specified timeframe.

When Branson launched Virgin Money in 2006, credit extension was at its peak and consumer appetite for debt voracious. He made big promises and guaranteed a shake-up of SA's financial services market. It hasn't happened. At its launch, Branson called banks "bloated and greedy". Almost three years later Virgin Money has less than half a percent of SA's mortgage market and less than 2% of the domestic credit card segment. It's fair to say the impact of its joint venture with Absa hasn't been as significant as its brash market entry suggested it might be.

"We restated our partnership with Virgin earlier this year. The business was attracting risk and we have cut back significantly," says Walker.

Neither party will disclose how much of the start-up capital of R250m has been used, whether a further cash injection will be required or whether there's shareholder appetite to further fund the venture.