English-based pair tipped as takeover front-runners

A lender is on the point of collapse; the government steps in, cleanses the firm of its nasty, toxic assets and sticks a For Sale sign on the healthy part of the business.

No, the newspapers have not accidentally reprinted seven-month-old stories detailing the demise of credit crunch-hit Bradford & Bingley. This time, it is the Dunfermline Building Society in the spotlight.

Treasury officials were last night poised to announce a resolution to the crisis in the Scottish mutual, first revealed by The Scotsman two weeks ago.

Like B&B, which saw its branch network and 21 billion deposit book sold to Santander in a 612 million deal, Dunfermline's profitable "core" business – including savings deposits, residential mortgages and insurance – is expected to be the subject of a takeover which could be announced as early as this morning.

The core business boasts a strong social housing book, 250,000 depositors and 36,000 mortgage and personal loan customers. It has assets of about 3 billion.

The building society claims its strong retail division is down to good customer service and competitively positioned products, as well as a lack of exposure to subprime lending – although it is understood to have been one of the last lenders to pull out of the 100 per cent-plus loans market. It also claims to have had no exposure to Icelandic banks.

The remaining assets – the so-called "toxic" commercial lending debts, believed to account for the majority of Dunfermline's 26 million losses – will be taken on by the Treasury.

Up to five financial institutions are understood to have registered a keen interest in an acquisition of Dunfermline's "good" assets, with Yorkshire Building Society and Nationwide the front-runners. Some of the other players are believed to be banks rather than mutuals.

It is understood any agreement will see the Dunfermline name retained, along with a large proportion of the branch and back-office network. However, the institution's Scottish headquarters may be axed.

Sources believe the Yorkshire is likely to be the best fit although, ultimately, the decision will depend on the price. Based in Bradford, the Yorkshire – which last year snapped up the Barnsley Building Society after it ran into trouble amid the collapse of the Icelandic banks – is geographically most suitable.

Mortgage broker Ray Boulger, of John Charcol, said: "It makes sense that it would need to be an institution with some presence in Scotland or the north of England. It would be a bit strange if an institution with branches in the south of England suddenly jumped to buy in Scotland."

Yorkshire is also believed to still have the financial power behind it to fund a substantial acquisition. Nationwide is large enough to take on the Dunfermline, although it has indicated previously it would prefer to focus on its recent acquisitions – the Derbyshire and Cheshire building societies – which it bought last year after the pair racked up first-half losses.

However, a spokeswoman for Nationwide said yesterday the bank would "not confirm or deny any involvement" in last night's talks.

The firm is the former employer of Jim Willens, currently Dunfermline's chief executive, who took over the role following the surprise departure of Graeme Dalziel in December.

Experts believe the only banks likely to be in a position to take on Dunfermline's retail business would be HSBC or Barclays – the two institutions which appear to be least badly hit by the financial crisis.

Graeme Forbes, managing director of corporate client services at Glasgow-based Intelligent Capital, said: "HSBC doesn't have much in the way of a mortgage book and might be looking to expand that aspect of their business. It is also quite thin on the ground in Scotland, so more of a presence up here could be a good fit for them.

"Barclays already has quite a large lending book through the Woolwich, so that is less likely."

However, he added: "I would imagine the government will want to keep the Dunfermline in the building society movement. To have it taken over by a bank could cause some trouble."