The deal would value the combined entity at around £1.6bn, with a little over 5% of the UK mortgage market.

In its 2017 annual results Virgin reported gross mortgage lending of £8.4bn (around 3% market share) while CYBG grew its lending to £5.5bn for approximately 2.1% market share.

Virgin Money posted a statement to investors this morning confirming that it had received a “preliminary and conditional proposal from CYBG to acquire the entire issued and to be issued share capital of Virgin Money”.

Under the terms of the proposal, Virgin Money shareholders would receive 1.1297 new CYBG shares for each Virgin Money share.

The lender noted that the board was in the process of reviewing this proposal.

“There can be no certainty either that an offer will be made nor as to the terms of any offer, if made. Accordingly, shareholders are advised to take no action in relation to this proposal,” it added.

Leading challenger bank

CYBG has until 5pm on 4 June to either announce a firm intention to make an offer for Virgin Money or announce that it does not intend to make an offer for Virgin Money.

In a statement CYBG said the proposal provided Virgin Money shareholders “with an attractive up-front premium and the opportunity to participate in the continuing progress of the combined group”.

It also argued that the combined group would “create the UK’s leading challenger bank” reaching six million customers.

“With this further strengthened customer franchise and national reach, CYBG believes the combination would deliver increased value for shareholders and wider benefits to other stakeholders,” it continued.

CYBG added there was no certainty that a formal offer would be made and the board would only proceed with a transaction if it was in line with strategic objectives and in the best interests of shareholders.