KBC Bank Ireland yesterday announced its plans to offer personal current accounts here, backed up by a Mastercard debit card. Chief executive John Reynolds quipped that it was 40 years in the making given that's how long the Belgian bank has operated here.

KBC traditionally focused on mortgages and business banking in Ireland. It all went swimmingly for the first 36 years as the bank never missed a profit. However, it came unstuck in a big way when the economy crashed in 2008.

Just under one in three of KBC’s €3.1 billion buy-to-let mortgage book in Ireland is in arrears, along with 18.8 per cent of its €9.2 billion book of owner-occupied home loans.

Its Irish losses in the second quarter narrowed to €69 million from €95 million a year earlier and Reynolds expects that arrears problem will peak some time in the first half of next year.

Reynolds hopes KBC will secure a 10 per cent market share of current accounts, about its level in mortgages. Over the past 18 months it has vacuumed up some €2.7 billion in deposits here and says it has 150,000 personal customers.

High-profile campaign
This moves follows hot on the heels of Permanent TSB's high-profile campaign behind its free banking current account – free, that is, once you're willing to mandate €1,500 into the account each month and conduct your business with the bank largely online. Permanent TSB's half-year results last week showed it secured 30,000 new current account customers following the launch of its product and approved €121 million in new mortgages.

Separately, South African bank Investec is looking at offering mortgages to first-time buyers here. It is expected to launch in the coming weeks and will make about €250 million available initially.

Competition is always a good thing but Permanent TSB, KBC and Investec are minnows in this market when compared with the big two – AIB and Bank of Ireland – and, to a lesser extent, Ulster Bank, which is owned by Royal Bank of Scotland.

AIB and Bank of Ireland have substantially more than a million customers each in Ireland.

In fact, both probably have more customers in mortgage arrears than Permanent TSB has secured in new current account customers this year.

On their own, Permanent TSB, KBC and Investec will remain subscale, niche operators. They are CityJet compared with Ryanair.

Put them together and you might have a real competitor to the pillar banks.

Together they would have the capacity to do more than €1 billion in mortgages. They could combine Investec’s obvious hunger to grow and invest in Ireland – it bought stockbrokers NCB last year – with Permanent TSB’s branch network and KBC’s foothold in the business banking market.

A partnership between the three would also enjoy the backing of the global resources and reach of KBC and Investec.

There would be issues to resolve. Permanent TSB still owes the State €2.7 billion in bailout funds. Earlier this year, its chief executive, Jeremy Masding, told me he didn't expect this would be repaid in full. It's simply too big a burden for a bank that generated total operating income of €119 million in the first half of this year.

Strategic stake
But the State could take a significant strategic stake in a three-way entity as a punt on the future upside of the business. So we might still get some of the money back, perhaps more.

The State would probably have to find a solution for the €6.3 billion of distressed Irish tracker mortgages that are being managed out by Permanent TSB’s asset-management unit but that will have to happen anyway.

Masding has spoken about the need for an “external” solution to this problem, which will have to extend beyond Permanent TSB. That needs to be addressed by the Government whatever happens.

There's also €2.2 billion in underwater commercial real estate loans that could be transferred to the National Asset Management Agency to add to its already enormous portfolio.

KBC has a significant mortgage arrears issue, too. If Permanent TSB has a best-in-class arrears and collection unit, as Masding suggests, then why not have it work out these loans over time, possibly under a different ownership structure, à la Certus?

Reynolds was cool on the idea when I posed it to him yesterday, citing KBC’s “distinctive approach” to banking and how it is gearing up to benefit when the economy returns to growth in 2014 or 2015.

That's fair enough but it's worth remembering that Aer Arann had to partner with Aer Lingus and UK transport group Stobart in recent years to carve out a profitable future for itself. Despite the strength of its brand, an excellent safety record and good quality service, the airline was simply too small to make its mark as an independent in the rough and tumble world of airlines.

Subscale banks in Ireland might find themselves faced with the same problem in years to come.