Sky News has learnt that the Co-operative Bank, which is owned by a syndicate of private equity firms and hedge funds, is among the parties which have tabled a bid for the book.

One insider said on Tuesday that the former mutually owned lender appeared to be the frontrunner in the process, which is being run by advisers at Deloitte.

Starling Bank also expressed an interest but withdrew from the auction some time ago, the insider added.

The move is significant, partly because it would herald Sainsbury's Bank's formal exit from the UK mortgage market after it ceased new lending in 2019, but also because of what it would signal about the Co-operative Bank's resurgence.

Sky News revealed a year ago that it had hired bankers from PJT Partners to help it spearhead the consolidation of the mid-tier UK retail banking market.

That move came soon after it had failed with a £1bn bid to prise TSB from the clutches of Sabadell, the Spanish bank.

The Co-operative Bank's annual results, due out next week, are expected to show a further improvement in its fortunes, bolstered by rising interest rates.

The company has twice come close to collapse in the last decade.

Sainsbury's Bank's decision to sell the mortgage portfolio has emerged days after Sky News reported that rival Tesco is weighing a disposal of its own banking operation.

Spokespeople for both the Co-operative Bank and Sainsbury's declined to comment.