A report by accountant KPMG out this week will warn that the downturn in the housing market is likely to lead to an increase in mergers among building societies, as bad debts from mortgages rise and profits fall.

The KPMG Building Societies Database 2008 says that while the 59 remaining societies have “weathered the storm comparatively well so far . . . the second longer and slower paced round of the credit crunch is now under way . . . [and] this poses more problems for societies.”

Richard Gabbertas, financial services partner at KPMG, commented: “It's inevitable there will be some more consolidation as market conditions worsen. Given the consolidation in the banking sector it would be surprising if there wasn't more in this sector.”

Gabbertas would not name societies that could come under pressure to merge, but any deals will most likely involve the biggest building societies, such as Nationwide, taking over smaller operators.

These deals may lead to cash windfalls for members of the smaller societies.

Chelsea Building Society announced plans in June to take over Catholic, the 57th by asset size, offering pay-outs yet to be confirmed.

The review also warns of “significant operational challenges” for societies, with “painful decisions to be taken around capacity” in mortgage sales, distribution and underwriting teams and a growing need for strong arrears management.