News that two of the biggest mutually-owned financial services providers planned to merge has prompted a warning that further consolidation in the sector is coming.
The proposed combination of the Britannia Building Society and the Co-operative's financial services business will create a group with £70bn of assets, nine million customers and 300 branches. Among mutual building societies, only the giant Nationwide will be bigger.
On a day when a steep fall in the share price of Barclays bank reflected deep concern among investors about the prospects for lenders, experts quickly predicted that other mutuals would follow suit.
Ray Boulger, senior technical manager at mortgage specialist John Charcol, said more mergers were inevitable. "In the current environment some societies will be coming under pressure."
The pace of consolidation has increased recently as building societies have grappled with a dramatic slowdown in housing markets.
The costs of the government's Financial Services Compensation Scheme to protect retail savers will also weigh heavily.
Last month Nationwide took over the Derbyshire and Cheshire Building Societies.
Cynics may assume that a merger of Co-operative Financial Services (CFS) and Britannia reflects weakness on the part of at least one party.
Britannia had exposure to the troubled buy-to-let market and to two unnamed banks that failed during 2008. The fact that CFS wrote down £25m in respect of complicated Structured Investment Vehicles in the first half might concern some.
However, both firms have large deposit bases and do not rely on wholesale funding markets. These seized up last year, bringing massive problems for banks that relied on them, including former building society Northern Rock.
Britannia recorded net funds inflows averaging £10m a month in the last three months of 2008, indicating consumers had confidence in its prospects. It added 145,000 members in 2008.
"They are not doing it from a position of weakness, they are doing it from a position of how they can serve their customers," said a spokesman for the Building Societies Association, referring to Britannia.
The merger will allow each firm to cross-sell services to an expanded membership. Besides the Co-operative retail bank network and the Smile online bank, CFS has a significant presence in long-term life assurance and general insurance. Britannia used to own one of the biggest life operations in Glasgow but is now focused on mortgages and savings.
Britannia said the impetus for the combination was provided by new legislation that will allow different types of mutual society to merge for the first time. Talks started six months ago.
Britannia said it had traded profitably in 2008, maintained balance sheet strength and strong levels of liquidity.
Co-operative Financial Services said it had traded strongly throughout 2008 and strengthened its capital and liquidity positions. Bad debt charges fell compared to 2007.
On a pro-forma basis, the enlarged group would have had a Tier one capital ratio of 9.8% at December 31. This would be the envy of some listed banks.
The merger is expected to generate £60m of revenue synergies and cost savings annually after three years.
This will help in a market in which demand for products such as mortgages may be relatively weak. The group will face stiff competition from rivals that are owned or controlled by the government.
The merger requires approval by members of Britannia Building Society. These will become members of the Co-operative group.
The society bought FS Assurance in 1990, Crusader of Greenock in 1991 and the Edinburgh-based Life Association of Scotland in 1993.
The Britannia Life operation employed 650 people in Glasgow until 1997, when the fund closed to new business.
The life business was acquired by Britannic Group in 1999. This merged with Resolution Life. which was acquired by Pearl. The closed life funds are administered by Capita in Glasgow for Pearl.
A sister fund management business, now called Ignis, operates in Glasgow under Pearl's ownership.
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