The financial services arm of the Co-Operative Group is in "early" takeover talks with building society Britannia ahead of a legal change which would allow the two to merge, the two companies said on Sunday.
The combined group would have around £70 billion of assets and 6 million customers.
Britannia, the country's second biggest building society, said the talks were at a very early stage and would cover a wide range of options as to how the two org
anisations could work together, including a possible future merger.
Britannia said in a statement it had similar values and shared a mutual ethos with Co-Operative Financial Services.
Britannia has an extensive branch network and a strong savings and mortgage franchise, it said, while CFS - part of the Co-Operative Group, the world's largest consumer co-op - has a strong personal and business banking franchise and life and general insurance expertise.
A spokesman for the Co-Operative Financial Services said the group had spoken to Britannia and other parties as part of its ambitious growth plans which were put in place a year ago.
"We're exploring a whole range of options and that might lead to a merger at some point in the future but then it might not," the Co-op spokesman said.
The spokesman said a full merger could not take place at the moment because mergers between mutuals and co-operatives were not currently allowed but this is likely to change either by the end of this year or early next year due to a bill in parliament.
A merger would also have to be approved in a vote by Britannia's members.
"We could obviously work in strategic partnership but no merger could occur until that (bill in parliament) takes place and that could be in 2009," he said.
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