Coventry Building Society has agreed a potential takeover of rival high street lender The Co-operative Bank for up to £780 million, the companies have announced.
The two groups have been in discussions over a possible merger for several months.
A deal would create a combined group with a balance sheet of £89 billion, making it a bigger player in the mortgages and savings market.
Coventry said it would look to integrate Co-op Bank gradually over several years, with the bank’s customers eventually becoming members of the building society.
It means Co-op Bank would return to a mutual ownership structure which it had more than 10 years ago when it was part of the wider Co-op Group, meaning it is owned by members rather than shareholders.
It parted ways with the group in 2017 when it fell into deep financial difficultly and was rescued by American hedge funds, and is now owned by a group of private equity investors.
Both lenders will continue to operate under their current names and branding while they work on the tie-up, a process which could take several years.
The lenders said they were working together to firm up the arrangements of the deal and stressed there can be no certainty that an acquisition will happen.
Co-op Bank has 50 branches across the UK with about 3,400 staff. Last month, it said it was planning to cut about 400 jobs across the bank as part of efforts to cut costs.
The chief executive of Coventry Building Society, Steve Hughes, said it is an “exciting moment” for the group, adding: “The Co-operative Bank is a financially stable, profitable organisation with a shared heritage and products and services that complement our own.
“Its customers, colleagues, branches, mortgages and savings balances, and the additional products and services it provides, will make us stronger and enable us to continue offering the value and service that matters to members and customers alike.
“We’re confident that we have the people, capability and the financial strength to bring both organisations together successfully over a number of years.”
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