Agreement has been reached to form an alliance with the Singapore-based Keppel Tat Lee Bank, AIB has said. The Republic's biggest bank has negotiated the right to take a 24.9 per cent stake in Singapore's fifth-largest bank within three years for 1.5 billion Singapore dollars (£661 million).

In the coming months, AIB will give up its Singapore banking licence and integrate its treasury and private banking business there within Keppel. AIB will shortly appoint two directors to KTL's board. One will be an executive director with responsibility for the strategic development of its services and products in the region.

Announcing the alliance yesterday, AIB group chief executive Mr Tom Mulcahy said it offered both institutions great opportunities. "We have been watching developments in that market very closely. This is the first time there has been any opportunity for a foreign bank to become involved so it's very exciting," he told The Irish Times.

Under the terms of the agreement, AIB will be issued with warrants worth 352 million Singapore dollars which can be converted into KTL shares within the next three years. The warrants guarantee that the bank can buy the KTL shares at 4.18 Singapore dollars each over that time. This entitles the bank to a 24.9 per cent stake in the bank for an investment of 1.5 billion Singapore dollars.

Under Singapore regulations, AIB cannot negotiate a bigger stake without making an outright bid for the bank.

Mr Mulcahy said that while the structure of the deal allowed the bank to walk away with its money in three years if it chooses, it is very committed to the alliance.

KTL chairman Mr Sim Kee Boon was optimistic about the link-up with AIB. "Keppel Tat Lee Bank will benefit from AIB's technology and expertise, especially in retail and commercial banking. Together we will grow the bank and enhance its position to expand its market presence in Singapore and the region," he said.

A strategic development committee, comprising senior executives from both banks, will be established to oversee the repositioning of KTL in the Singapore market and in the Asia Pacific region.

AIB has operated in Singapore since 1984 and employs 80 people there.

KTL has 39 branches in Singapore plus branches in Hong Kong, Labuan (in Malaysia), and Vietnam and employs 1,200 people. It also has representative offices throughout the region.

The bank has been relatively resistant to the financial difficulties that beset South East Asia in the past two years. Since 1997 it has made huge provisions against loans advanced throughout the region and has still managed to achieve profit growth. At the end of December 1998 it reported pre-tax profits of 84 million Singapore dollars.

Singapore has remained relatively immune to the financial crisis and remains one of the world's wealthiest states. Economic forecasts suggest the economy will grow by 2.1 per cent this year, rising to 3.5 per cent in 2000. In the longer term, economists predict the pace of Singapore's economic growth could accelerate to 5.7 per cent by 2002.

It has a population of 3.7 million and is one of the world's busiest ports. AIB says it has enjoyed a good working relationship with the Singapore government and the regulatory authorities and is looking forward to developing its business interests in that market.

The Singapore deal will further diversify AIB's earnings. Outside the Republic, it has substantial operations in the US and Eastern Europe. It is shortly hoping to expand its presence in Poland where it has won the right to exclusive negotiations on the sale of 80 per cent of the Bank Zachodni, based in Wroclaw.