We now know that whatever comes of Royal Bank of Scotland's strategic review of Ulster Bank, it won't involve KBC Bank Ireland. At least not until 2016.

At a session with investors yesterday, the Belgian institution said its focus in Ireland is to return the bank to profit in 2016 and to focus on building out its consumer retail offering – current accounts, personal loans, credit cards and such like.

“First priority for Ireland is to become profitable from 2016 onwards. As of then, all available options (organically grow a profitable retail bank, build a captive bank-insurance group or sell a profitable bank) will be considered,” KBC said.

This would also seem to rule it out of any third banking force Minister for Finance Michael Noonan has spoken about in recent months.

To recap, RBS announced in February that it would carry out a strategic review of Ulster Bank's operation in the Republic. It later appointed Morgan Stanley to carry out the bulk of this work.

Ulster Bank's business in Northern Ireland is to forge closer ties with RBS in Britain, effectively separating it from the Republic. In addition, RBS has taken £9 billion in toxic loans away from Ulster Bank to a centralised restructuring group.

Talks

RBS's advisers are reported to have held talks with private equity giants Warburg Pincus, CVC, KKR and Permira with a view to them possibly investing in Ulster Bank. That would effectively be stage one of the process.

Stage two would involve a merger with another Irish bank. With KBC now seemingly out of the picture, Permanent TSB, which is 99.2 per cent owned by the State, would seem to be the only viable player in that space.

Investec, which currently has a niche presence in Ireland, is thought to be unlikely to be interested in such a deal, and there is no queue of foreign banks waiting to enter the Irish market.

At a later date, the enlarged Ulster Bank might be floated on the stock market, presumably to give its private equity backers an exit, not to mention RBS.

RBS’s appetite to do a deal is unquestioned, but that’s not to say that one will be concluded.

An information memorandum for interested parties is still some weeks away, I’m told, and it seems unlikely there will be any significant commentary on Ulster Bank’s future when RBS publishes its half-year results on August 1st.

Speculation around private equity interest in Ulster Bank is easy to understand. For a start, Ulster Bank is expected to make a profit this year – that’s a profit for the whole year as opposed to a return to the black at some point in 2014.

It is certainly a more attractive proposition now that the big-ticket problem loans have been taken away by the parent for separate resolution. And its arrears problem is improving, as resolutions stick and employment growth and rising house prices change the metrics.

The narrative about private equity interest is aided by the experience of US billionaire Wilbur Ross, who liquidated his position in Bank of Ireland last week after three years with a handsome €477 million profit. But Bank of Ireland is one of two big beasts in the banking jungle here and was the best of a bad lot when the sector crashed in late 2008.

Neat solution

For sure there is a lot of private equity cash chasing deals in Ireland at the minute, but that’s mostly in commercial real estate, where yields are good and big discounts are being applied to the par value of the loans.

Merging Ulster Bank with Permo might sound like a neat solution but it’s one fraught with risks. For a start, history shows bank mergers are difficult to pull off successfully.

Permo chief executive Jeremy Masding and his colleagues have done a good job in tidying up the bank. It has an excellent arrears collections unit and the "good bank" is lending again, albeit modestly.

But the funding drag from its €14 billion tracker mortgage book is €75 million. That’s a hefty drag for a business with total income of about €240 million.

On its visit to Dublin last week, analysts from Standard & Poor’s reiterated their “negative” view of Permo. “Several challenges remain,” it said, “not least, whether the core Irish retail bank can demonstrate meaningful, recurring returns in a low-interest rate environment.”

Permo still has to get the green light from the European Commission for its restructuring plan and it is fingered by many as the Irish bank most likely to be tripped up by the pan-European capital stress tests that are underway.

S&P is only slightly more positive on Ulster Bank, and only because of the support it receives from RBS.

It will be some time before we know the result of RBS’s review of Ulster Bank. Unless a private equity white knight comes riding over the hill, it could end up being a case of as you were. At least until 2016, when Permo and KBC are likely to be back in profit and better positioned for a deal.