Northern Rock in sights of Coventry

Coventry Building Society, one of Britain's biggest mutually owned financial companies, has signalled its interest in buying Northern Rock, the nationalised British bank that is expected to be sold back to the private sector.

Coventry said Northern Rock's customers would benefit if it was integrated into its business since it had performed relatively well during the financial crisis.

"The board believes that these credentials would benefit Northern Rock customers if it were to be remutualised as part of Coventry Building Society," it said in a statement.

Northern Rock was nationalised three years ago after becoming the first major British bank in more than 150 years to suffer a bank run.

UK Financial Investments, which owns the bank on behalf of UK taxpayers, has not yet set a timetable for a possible sale of Northern Rock, and Coventry said it would take its next steps once this was known.

Virgin Money, supermarket retailer Tesco's banking arm and private equity firm JC Flowers have also been cited as possible buyers of Northern Rock.

The government split Northern Rock in two last year, forming a mortgage and savings bank called Northern Rock plc and Northern Rock Asset Management (NRAM) - known as the "bad bank" - to house the bank's toxic loans. It is the so-called good bank which is preparing to return to private ownership.

Yesterday UK Asset Resolution (Ukar), which owns the toxic loans made by both the failed lenders, Northern Rock and Bradford & Bingley, reported a return to profit although it warned of trouble ahead.

The revelation sparked outrage among former Northern Rock shareholders, who claimed their shares were "expropriated" by the government when it took over the lenders.

The former shareholders have taken a case for fair compensation to the European Court of Human Rights.

Ukar said it earned a combined pre-tax profit of 1.48 billion, compared to a loss of 454 million in 2009.

The head of Ukar downplayed the bad bank's success, warning that this year could be tougher as tax hikes and layoffs raise pressure on borrowers.

Richard Banks, chief executive of Ukar, said: "B&B and NRAM moved from loss to profit and we continue to focus on managing customer arrears. The combined business is now better placed to move forward in 2011.

"However, the uncertain economic environment, increases in taxes, inflation and unemployment will, inevitably, impact customers and our financial results."

The aim of the group is to eventually run down its 110bn balance sheet, mainly through mortgage redemptions.Last year B&B received 2.1bn in redemption payments, down from 2.5bn in 2009, and NRAM 4.3bn.

Both banks still owe a total of 48.1bn to the government.

NRAM said it had repaid 1.1bn of its loan to government over the year to reduce its balance to 21.7bn, while B&B's loans from the government remained unchanged at 27bn at the end of the year.

Ukar said the 850,000 customers within both banks benefited from rock-bottom interest rates as the Bank of England's base rate stayed at a record low of 0.5 per cent throughout the year.

Ukar said although repossession of homes was viewed as a "last resort", the group took back 2,607 properties in 2010 compared to 3,023 the previous year.