CYBG, the owner of Clydesdale Bank and Yorkshire Bank, has agreed to buy Virgin Money for £1.7 billion.

Under the terms of the offer, Virgin Money shareholders will receive 1.2125 new CYBG shares in exchange for each Virgin Money shares.

Following completion of the offer, Virgin Money shareholders will own approximately 38% of the combined group.

CYBG has agreed an exclusive, perpetual, royalty-bearing licence to use the Virgin Money brand for financial services in respect of retail, SME and corporate customers in the UK. It will be paying an annual royalty of between £12m-£15m.

Jim Pettigrew, chairman of CYBG, David Duffy, CEO of CYBG and Ian Smith, CFO of CYBG will retain their current positions in the combined group.

Jayne-Anne Gadhia, CEO of Virgin Money, has agreed, in principle, to be a senior adviser to the CEO, in a consultancy role, for a period of time, on terms to be agreed.

David Duffy, CEO of CYBG, said: “The combination of CYBG and Virgin Money will create the first true national competitor to the status quo in UK banking, offering a genuine alternative for consumers and small businesses.

“By combining two of the UK’s leading challenger banks, we will create a national, full-service bank with the capabilities needed to compete effectively with the large incumbent banks. We are bringing together CYBG’s 175-year heritage in serving retail and SME customers and advanced digital technology, with the iconic Virgin Money brand and consumer champion credentials.

“Together we will serve around six million customers, with the scale, capabilities and financial muscle to disrupt the status quo – and with a clear ambition to provide our customers with the best service in the UK.

“CYBG and Virgin Money have similar values, with strong roots in our regional heartlands and a shared vision for how the Combined Group can be a leading force in the banking model of the future, whilst maintaining our strong people-focused values. I am hugely positive about what we can achieve together with the talent that is available on both sides.

“The strategic rationale is clear and offers both sets of shareholders real value, material earnings accretion, and enhanced capital generation for the benefit of all shareholders, together with both firms’ customers, colleagues and local communities.”