The UK’s third biggest building society is in talks to merge with a smaller rival in the latest of a series of tie-ups in the struggling sector.

Coventry Building Society is discussing the possibility of joining forces with Stroud & Swindon in a move that could create a new enhanced player with more than £20 billion in assets.

Negotiations are at an early stage after Coventry approached the smaller group earlier this year.

Stroud marketing director Linda Will confirmed the talks and said the firm’s board had an obligation to consider any serious proposal.

“We are in very early stage talks about which there is no detail,” she said.

Stroud will be the 10th largest mutual after the completion of the tie-up between the Chelsea and Yorkshire building societies at the end of this month.

The society, which has 265,000 members and just under £3 billion in assets, employs 400 people across its Stroud headquarters and branch network of 22 offices and 21 agencies in the South West.

Stroud has suffered in the low interest rate environment, with losses of £3.4 million in 2008 and bad debt provisions of £1.8 million.

Meanwhile Coventry last week reported pre-tax profits had more than doubled in 2009 to £56.2 million in 2009.

The society lent a net £919 million for mortgages last year and grew its retail balances by £833 million. It has assets of £18.4 billion.

Coventry has 1.2 million members and a network of 48 branches located throughout the Midlands.

A statement from Coventry said there is no certainty that a merger will take place and the deal would only go ahead if it were to benefit members of both organisations.

“Any merger, if agreed, would require the formal approval of Stroud & Swindon’s savings and borrowing members as well as confirmation by the Financial Services Authority,” it said.

The statement added that no action by members is required.

The merger talks add to the wave of consolidation in the mutual sector during the past two years.

It follows a deal between the Yorkshire and Chelsea building societies - the UK’s second and fifth largest - that will create a major force in the mutual sector, with assets of £35 billion, 178 branches and 2.7 million members.

Chelsea previously took over the Catholic Building Society, while the Yorkshire took over its smaller rival Barnsley Building Society in 2008.

Nationwide has taken on the savings arm of Dunfermline, as well as the Derbyshire and Cheshire, while Skipton Building Society took over Scarborough last year.