Dunfermline Building Society in crisis with £26m loss

The 130-year-old mutual, which has about 240 staff, has been plunged into turmoil through its exposure to the beleaguered commercial property market, The Scotsman has learned.

It is understood the society will reveal an expected loss of about 26 million in the next few weeks, compared with a 2 million profit last year. That has forced it to consider submitting to a takeover by a larger society.

Last night, Dunfermline MP Willie Rennie described the news as a "severe blow to the Scottish banking sector".

And Sir Menzies Campbell, former leader of the Liberal Democrats and MP for North East Fife, said: "If the Dunfermline is taken over by a UK national institution, then it is another example of a Scottish bank finding it difficult to maintain its independence."

The crisis at the Dunfermline comes as Lord Turner, the chairman of the Financial Services Authority, yesterday unveiled a plan to overhaul UK banking rules to try to avoid a repeat of the current financial crisis.

His report aims to cut banks' ability to take excessive risks in lending.

A takeover of the Dunfermline would be a fresh blow to Scotland's already diminished financial services sector. HBOS has been taken over by Lloyds, and Royal Bank of Scotland is hobbled by state ownership.

Although it is not in the same league as the banks in size, the building society – Scotland's biggest – is one of the country's best-known brands.

Exposure to commercial property deals is believed to be at the heart of the crisis, although its core business of savings and insurance is understood to be sound. The vast majority of its expected losses are thought to be from exposure to bad loans in the commercial property sector and a push into buy-to-let loans in recent years.

It is believed that, as a result of it plunging into the red, the Dunfermline has sounded out possible "merger partners", including Yorkshire Building Society and Nationwide. The latter is the former employer of Jim Willens, the Dunfermline's chief executive, who took over the role following the surprise departure of Graeme Dalziel in December.

It is also understood Jim Murphy, the Scottish Secretary, has met senior executives from the Dunfermline to discuss the issue.

As a deposit-taking building society, the Dunfermline would potentially be eligible to apply for some of the government's bail-out schemes.

A spokeswoman for the society refused to comment on the accounts or a potential merger. She said: "Our board remains open to all options and will assess them based on the developments in the sector."

Asked if the group stood by a pledge by Mr Dalziel six months ago that the Dunfermline would remain "an independent mutual building society", she replied: "Graeme is no longer here. That was his statement back then, not now. We are committed to remaining a mutual."

The latest news comes months after the Dunfermline first admitted it was suffering from the downturn in the financial sector. In September, it announced it was to cut a fifth of its workforce in an effort to manage costs in the wake of falling mortgage sales. And in December it said it expected the coming year to be "difficult".

The Dunfermline was one of the last lenders to pull out of the 100-per-cent-plus loans market, while it also had a considerable exposure to buy-to-let loans and lending to commercial property borrowers.

Ray Boulger, of the mortgage broker John Charcol, said he believed the Yorkshire was the most likely merger partner.

"It would have to be one of the top five players," he said. "Perhaps a society in England which doesn't have much in Scotland and is looking to broaden its reach would be the most likely.

"Nationwide has said it is not looking to make any more acquisitions at the moment, while Britannia has just merged with the Co-op Bank," he added. "Yorkshire would also seem to be the best geographical fit."