Bank of Ireland and Irish Life & Permanent are at an advanced stage in talks about producing a joint bid to buy Ulster Bank from National Westminster Bank. The negotiations may result in the two institutions presenting a bid of up to £2.5 billion (€3.2 billion) next week.

Both banks are interested in parts of Ulster Bank and have been discussing whether it is mutually beneficial to bid together to achieve their ambitions.

Bank of Ireland has made no secret of its desire to expand its presence in Northern Ireland and would be interested in acquiring Ulster's operations in that market.

At the same time Irish Life & Permanent wants to acquire Ulster's branch network in the Republic. This would allow it to become a major player in the retail financial services market, giving it crucial access to the bank clearing system.

Neither group would comment on the discussions last night.

Irish Life & Permanent has appointed Schroeders and DLJ Phoenix as corporate finance advisers on the deal.

The discussions are centred on the structure of any joint bid and the likely valuation of the various segments of Ulster Bank. The advisers will have to decide how the bank should be carved up if the bid was successful.

Ulster's operations in the Republic contribute the bulk of the group's profits, generating 60 per cent of them in the current year. Apart from the retail operations, the bank's activities in the Republic also include a substantial treasury division and an asset management unit which may or may not be attractive to either side.

Irish Life & Permanent will have to consider how it would fund the purchase of Ulster Bank's branch network. This may include a rights issue or it may be forced to sell its US operations to raise the necessary funds. Bank of Ireland by contrast is in a financially strong position to make an acquisition in Northern Ireland.

Even if the two banks produce a joint bid, they will face stiff competition. Other contenders could include AIB or an EU bank. All bids must be presented to NatWest by November 11th. NatWest is selling Ulster Bank as part of its defence strategy against the £21.1 billion sterling (€33.1 billion) hostile bid for the British bank by Bank of Scotland. It is also considered floating Ulster Bank on the stock market but most analysts expect it is now more likely to be sold.

Any such bid might be referred to the Competition Authority.