Treasury fires starting gun on race to buy the Rock

State-owned bank is split in two ahead of sale of performing assets

Suitors of Northern Rock's "good" bank are gearing up for a bid battle after the Treasury yesterday confirmed that the company had been formally split into two legal entities.

Virgin Money – set to be renamed Virgin Bank – and National Australia Bank, the owner of Yorkshire Bank and Clydesdale Bank, are readying themselves to enter the fray when the state-owned mortgage and savings bank is formally put on the market. That is expected to be later this year.

Both halves of the business will be run by Rock chief executive Gary Hoffman, while the "good" part – to be known as Northern Rock plc – is readied for the sell off. It contains savings balances of around £19 billion plus approximately £10bn of relatively low risk residential mortgages. There are also a number of wholesale deposits.

Northern Rock plc is a key part of the Government's strategy of introducing more competition into Britain's banking market by helping new players compete with the "Big Four" of Lloyds, Barclays, Royal Bank of Scotland and HSBC.

Virgin, which is awaiting a banking licence from the Financial Services Authority, has ambitions to become a serious force in UK banking and is readying a high-profile board of non-executive directors, who are expected to be announced within weeks.

The company last year went as far as holding talks with former Northern Rock chairman Brian Sanderson although was not able to announce an appointment. It has already made one attempt to buy Northern Rock, prior to its nationalisation.

Virgin will kick off with an internet banking operation with Northern Rock set to be bolted on if it prevails in the competition to buy it.

National Australia Bank has already held a "beauty parade" of advisers ahead of a possible bid of its own. Adding Northern Rock would represent a step change in its primarily regional UK business.

Two further banks are to come on to the market, made up of branches spun out of Royal Bank of Scotland and Lloyds, but they have up to four years to sell and are likely to wait until the market shows further signs of improvement to maximise the returns to their shareholders from the disposals. The sales have been demanded by the EU because of the state aid that both have received.

Northern Rock plc will service the loans held by the "bad bank", Northern Rock Asset Management, and customers will therefore be able to contact the company using existing telephone numbers and through existing branches. The arrangement could continue after a sale.

Customers are set to receive letters over the next few weeks informing them which half of Northern Rock holds their loans. Northern Rock Asset Management holds £50bn of home loans, 90 per cent of which are performing, as well as £4.5bn of unsecured loans.

"I am pleased to announce that we have successfully completed the legal and capital restructure of the business. This helps to build a stronger future and delivers value to taxpayers," Mr Hoffman said.

"All savings accounts have been transferred to the new bank and we are writing to our savings customers to confirm that. We are also writing to mortgage customers of the new bank to confirm that their accounts have been transferred as part of the restructure. Our aim was to make this process as smooth as possible for all of our customers. They do not need to take any action and can continue to contact us in the usual ways."