Over the next couple of weeks National Australia Bank's (NAB's) top brass and its advisers, Lazard, will have to haggle fiercely with the canny bankers at Halifax Bank of Scotland to get a reasonable price for National Irish Bank (NIB) and Northern Bank. There will be much posturing and horse-trading but most observers believe a deal will be done sooner rather than later.

This was a grim week for NAB. The troubled bank brought in a disappointing set of figures for 2004 with group earnings down 15 per cent to 3.46 billion Australian dollars (€1.87 billion). Earnings from its European banks, including NIB and Northern, fell 29 per cent.

NAB chief executive Mr John Stewart pledged that he would work hard to rebuild the bank but told investors there were "no quick fixes" for its underlying problems.

The group is now working to a new strategy designed to revive one of Australia's biggest banks. When asked to comment on the fate of the two Irish banks, Mr Stewart told analysts it was making progress on whether it would sell or retain the two banks and said the situation was likely to be resolved within a few months.

Once again, he stated that, if it failed to get an attractive bid for NIB and Northern that reflected their true value, they would not be sold. NAB says that, in this scenario, it will invest in both banks and grow them organically. But that is not Mr Stewart's preferred strategy. Most observers believe the bank has already cut NIB and Northern Bank adrift. The money needed to boost their fortunes is badly needed in other parts of the business.

It was a great disappointment to NAB that none of the three financial institutions it had expected to put a bid on the table came forward. HBOS has long been seen as the favourite to acquire the two banks but has yet to put a firm bid to NAB. Lloyds TSB and Rabobank were both mentioned as being likely to make indicative bids for the two banks but have walked away.

The smart money remains on HBOS. The Scottish bank has a presence in the Republic through Bank of Scotland Ireland and operates a small number of Halifax branches in Northern Ireland.

In the Republic, the bank is a significant player, providing services to small and medium-sized businesses and it very successfully built its brand when it muscled into the mortgage market almost five years ago. It cleverly began to sell mortgages, to low-risk customers here, from its base in Edinburgh at a discount that was swiftly matched by the other lenders and won the kudos for making mortgages cheaper.

Earlier this year, the bank announced that it was preparing to become a force in retail banking and was gearing up to start offering current accounts, savings products and credit cards to Irish consumers. At the time of that announcement, the bank claimed it didn't need a branch network to achieve its objectives and would make them available over the telephone and internet. But a branch network would make its task much easier.

HBOS may not have shown the colour of its money to NAB yet but it has manoeuvred itself into a strong position to achieve its aims.

It has let it be known that it doesn't like the look of NIB and Northern Bank's information technology systems and there are suggestions that it would have to invest more than €100 million to bring it up to speed with its own. Its hand was further strengthened by the banks poor trading performance and there have also been mutterings about overstaffing at Northern Bank.

The continuing uncertainty is difficult for NIB and Northern Bank staff both in terms of their job security and their likely future terms and conditions of employment. They will be looking to the Irish Bank Officials Association to ensure their jobs are protected.

The sale of the banks to HBOS would bring fresh competition in retail banking to Irish consumers, who have long felt ripped off and badly served by the State's financial institutions. New initiatives designed to make it easier for consumers to switch accounts amongst financial institutions, which are due to be adopted in February, will help Bank of Scotland to win new customers through promotions and competitive pricing as it seeks to gain a share of this lucrative market.

And NAB will shed few tears over the disappearance of the NIB brand. After 13 years in the Irish market, NIB will be remembered for its systematic overcharging of customers in certain areas for a long number of years and for its part in encouraging customers to evade tax through the unauthorised offshore products it sold. These scandals ultimately cost the bank €75 million and the damage to its brand was irreparable.

Its Australian parent had to wait until the six-year investigation into these dubious activities was completed before it could hoist the "for sale" sign. This week it looked like NAB's exit from Ireland may prove no less traumatic and expensive than its past experiences here.