Allied Irish Banks is considering expanding its interests in eastern Europe, with a bid or possible major investment in one of the banks expected to be privatised by the government of the Czech Republic. AIB already has a 60 per cent stake in the Polish bank WBK, assembled at a cost of £96 million.

The Czech government is expected to decide next month on the privatisation of a number of banks, including the largest bank in asset terms, Komercni Banka. Other banks that may be sold include the savings bank Ceska Sporitelna and the trade bank Ceskoslovenska - which is owned jointly by the Czech and Slovak governments.

Another potential privatisation is Agrobanka, which was taken over last year by the Czech central bank after a run on deposits when officials at a brokerage which owned Agrobanka were charged in connection with the failure of a smaller bank.

AIB chief executive Mr Tom Mulcahy, who visited the Czech Republic last week, confirmed AIB's interest in the Czech banks in an interview with the Bloomberg news service.

Apart from AIB's substantial presence in Poland, other Irish financial institutions have been targeting eastern Europe for expansion. Earlier this year, Irish Life - in a joint venture with Kredietbank of Belgium - paid £60 million for a 56 per cent stake in the privatised bank K&H. The underbidder for K&H was Bank of Ireland, which had previously bid unsuccessfully for Bank of Budapest.

AIB's interest in the Czech Republic follows the success of the bank's investment in WBK in Poland, although credit curbs by the Polish central bank mean that WBK is not going to meet its profits target this year. WBK had targeted a 19 per cent profit growth to £37.4 million.

In his Bloomberg interview, Mr Mulcahy said that the stake in WBK was profitable for AIB, but growth has been slowed by the difficulty in finding suitable local management.

If AIB does expand into the Czech Republic, it will be moving into an economy which is showing far slower growth than Poland. While Poland's economy is growing by 6.5 per cent a year, growth in the Czech Republic is between 1 and 1.5 per cent and possibly 2.5 per cent next year. "We've seen some improvement in the real economy in the Czech Republic in terms of productivity, industrial output trends and export trends," said Ms Susanne Gahler, an analyst with JP Morgan Securities.

Analysts said that an acquisition or large investment in the Czech Republic would be consistent with AIB's strategy for growth, although they were concerned about the scarcity of available local management.

"Banks consider acquisitions as an opportunity to get a foothold at relatively moderate cost. Assuming that works out and they can improve the banks significantly, they can form a very strong base for participating in further consolidation," said Merrill Lynch banking analyst Mr Richard Coleman.

He added that Bank of Ireland was also considering an acquisition in the Czech Republic.