Britain’s embattled building societies could be forced into a fresh round of mergers and acquisitions, amid paralysed wholesale lending markets and with their profits crumbling, it is predicted today.

The CBI says that confidence among building societies is at “rock bottom”, having fallen to its lowest level since its polls began 18 years ago.

In its latest survey, published in conjunction with PricewaterhouseCoopers (PwC), the consultancy, the CBI says that profits at the societies over the three months to early December fell at their fastest rate since September 1992. They are expected to fall further and at least at the same pace in the current three-month period, the survey says.

John Hitchins, the UK banking leader at PwC, said that “most” building societies were being denied access to wholesale markets, which are crucial for funding, although he said that a Northern Rock-style crisis at a society was unlikely.

“If a building society was going to collapse, it would have happened by now,” Mr Hitchins said. “I think, though, that there will be M&A.”

The survey shows that a two-year bull run across the British financial services sector had come to a sharp halt. Profits at banks and securities dealers have also collapsed and confidence has slumped, with business volumes falling at their fastest rate since March 1991. The CBI said that financial firms feared that fresh down-grades by credit agencies would prompt a renewed round of write-downs by UK lenders. Several banks had started to increase staffing levels in their debt workout groups, it said.

Only fund managers and insurance brokers managed to shake off the impact of the funding and lending squeeze, the survey says.

Ian McCafferty, the CBI’s chief economic adviser, said: “The majority of financial services firms believe it will take some time for conditions to improve and a deterioration over the coming months is quite likely.”

Because of their size and exposure to the housing market, which is widely expected to experience a correction this year, building societies have been hit harder than most by the credit squeeze. Their traditional conservatism has also led to them heavily scaling back their lending practices amid worries about consumer credit. Almost 60 per cent of the building societies that responded to the survey said that they were lending less, including mortgages, than over the previous three-month period. The same number said that they planned to approve fewer loans over the current quarter. Only 11 per cent of those that responded to the survey said that they would lend consumers more.

Mr Hitchins said that the building society model was well suited to dealing with a market downturn. Because societies are not accountable to shareholders, they simply can scale back their lending as necessary, he said. However, the smaller a business, the more vulnerable it is to a predator.

Nationwide and Britannia are the UK’s two biggest and oldest building societies, out of a total of 59, which between them hold assets of more than £315 billion. More than 15 million savers and 2.5 million borrowers use the societies, which account for about 20 per cent of all mortgages.

Consolidation has moved slowly, with firms demutualising and opting for a stock market listing to improve their financial firepower. In 2006, Nationwide’s £500 million takeover of Portman created a new group with assets of £150 billion.

A spokesman for the Building Societies’ Association said that record amounts of savings were being poured into societies, although he accepted that the mortgage market was “challenging . . . Building societies have different views about what is going to happen in the future. It is likely that there will be further consolidation in the sector over the long term,” he said.

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