A FAVOURITE to buy Northern Rock, led by its former chief executive, effectively ruled itself out of a bid for the lender last night.

As widely expected Chancellor George Osborne used his annual Mansion House speech last night to announce the Government intends to sell the nationalised bank back to the private sector.

He said: "The independent advice I have received is that a sale process is likely to generate substantially the best value for the taxpayer and should be explored as a first option."

It follows a recommendation by Deutsche Bank, which was appointed by "good bank" Northern Rock plc in March to examine options for its future.

NBNK Investments, which started trading in August last year, had been expected to be one of the frontrunners to buy the Newcastle based lender, nationalised more than three years ago. However, under an agreement made when Northern Rock's former chief executive Gary Hoffman left the bank last year to head up NBNK, it cannot make a bid until November 1.

Last night there seemed little appetite to contest this. An NBNK spokesman said: "At the time of the announcement last year NBNK agreed not to be involved in a bid for Northern Rock until November and that remains the case."

The Northern Echo understands that although NBNK admires the Northern Rock business, with 74 branches it does not meet the scale it is looking for.

It is understood NBNK wants up to 600 branches and would therefore rather concentrate efforts on acquiring the Verde business, the assets Lloyds Banking Group must relinquish under the agreement which saw it granted state aid.

The Verde business of more than 600 branches includes the TSB brand, the Cheltenham and Gloucester business, Lloyds TSB Scotland and more than 250 Lloyds TSB branches throughout England and Wales.

With another favourite to buy Northern Rock, Virgin Money, also keen on Verde it could clear the way for a building society to buy the Newcastle lender.

Both the Yorkshire Building Society and the Coventry Building Society have expressed serious interest in recent weeks and as the second and third largest UK mutuals respectively, with assets of £30bn and £22bn, could meet the £1bn price tag.

Listing Northern Rock on the stock market or direct mutualisation by the Government, the option supported by Business Secretary Vince Cable, were also considered by Deutsche Bank and UK Financial Investments, (UKFI) the organisation which oversees the Government's banking assets, before being ruled out.

Despite posting pre-tax losses of £232.4 million in 2010, Northern Rock narrowed losses in the second half of the year to £92.4 million, compared to £140 million in the first six months.

The Government will retain ownership of bad bank NRAM, which was split from Northern Rock last year.

The Chancellor also used his Mansion House speech to London bankers and merchants to say he is to force banks to ring-fence retail from investment banking.