Co-op and Britannia to form a super-mutual

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Britannia Building Society and the Co-operative Financial Services (CFS) are combining to form a "super-mutual" lender to challenge Nationwide and the country's battered banks.

The merged lender will have 9 million customers and assets of about £70bn. The deal will bring together Britannia's branch network, savings and mortgage business with CFS activities in current accounts, corporate banking and insurance.

Neville Richardson, chief executive of Britannia, will lead the business, with David Anderson, chief executive of CFS, leaving after the deal is completed. The merger, scheduled to complete in the summer, is expected to yield cost and revenue gains of £60m a year in its third year.

The lenders said there would be no compulsory job cuts in their branches, which number more than 300, and that reductions in other operations could be made through natural turnover. Both brands will be kept for some time after the merger and may be combined or kept separate.

The combined group will try to lure customers who are disillusioned with the country's banks by promising fair treatment and ethical policies. The CFS has the strongest ethical policies of all Britain's banks, including pledges not to do business with tobacco or arms companies.

Mr Richardson said: "People are losing faith in the shareholder banks and are looking for something not represented by them. The more people are worried about the shareholder banks, the more new customers we are getting."

The deal will not lead to a windfall payout to Britannia members, unlike the demutualisations of the 1990s. Mr Richardson said windfalls were now a thing of the past and that members would benefit from the merger through lower prices or bigger dividends.

Britannia, the country's second-biggest building society, said it had suffered losses from two failed banks and also faced exceptional costs from contributing to the Government's Financial Services Compensation Scheme. But Mr Richardson said the charges were not material and had nothing to do with the society's agreement to merge with the CFS.

Many building societies have weathered the credit crunch better than the banks because they rely mainly on savings rather than frozen money markets for their funds. But the sector has been hit by lack of mortgage activity while some, such as Derbyshire and Cheshire, have been caught out by large bad debts.

Mr Richardson said Britannia and CFS were prepared to absorb societies seeking a bigger parent to consolidate the industry.

Standard & Poor's put Britannia's "A-" long-term counterparty credit rating on a negative credit watch, saying that integrating the two lenders could be a big challenge and that the deal was happening against the backdrop of a recession and a weak housing market.

Britannia members will meet on 29 April to approve the merger.