Analysis: The deal between First Active and Royal Bank of Scotland answers many questions but ultimately poses greater challenges for the big Irish banks, writes Siobhan Creaton, Finance Correspondent.

The agreed takeover ends the speculation about what will happen to the former building society that has been so impressively restructured. But more significantly, it ends talk about Royal Bank exiting the Republic.

The agreed takeover shows that the Scottish titan is here to stay and intends to make its presence felt in the mortgage and retail banking markets.

The deal, which is almost certain to go ahead, means that about 80 per cent of the Irish mortgage market will be controlled by four banks - Permanent TSB, Bank of Ireland, AIB and Royal Bank of Scotland. It will be a formidable competitor. Indeed, some of the Irish banks may be questioning why they didn't move on First Active themselves and block chief executive Mr Fred Goodwin and his group.

For now, Mr Goodwin says that First Active and Ulster Bank will co-exist as two competing brands in Ireland. Over time though, there is huge scope to integrate and rationalise these businesses with First Active likely to emerge as the dominant brand in the Republic.

The deal is accepted as being a good outcome for First Active shareholders who have endured something of a rollercoaster ride over the past five years.

The flotation happened at a time when the stock markets had fallen sharply and were priced at the lower end of expectations with some commentators suggesting it should have delayed its stock market debut.

The shares never managed to take off like those of Anglo Irish Bank and other Irish financial institutions. Investors couldn't see much growth potential at First Active given its high cost base and its reliance on the mortgage and savings markets.

The mortgage price war, sparked by Bank of Scotland's aggressive entry in 1999, dealt a blow to First Active. The management team who had brought the building society to the stock market left. Commentators muttered about the reshuffling of deck chairs on the Titanic.

Mr Cormac McCarthy, who joined First Active just before the flotation, was put in charge of the recovery plan with an aim to make the business attractive to a major financial institution.

Today, First Active has about 12 per cent of the Irish mortgage market. It generated €33.9 million in profits in the first six months of this year. The business is now very lean, operating with a cost to income ratio of about 50 per cent. This is broadly in line with Ulster Bank although Royal Bank of Scotland, which has blazed the trail in terms of squeezing costs, operates on a ratio of 42 per cent.

For all of Mr McCarthy's utterings about First Active's ability to remain independent, it was always a matter of time before a suitor emerged. And so in recent weeks, Royal Bank's Mr Goodwin came knocking. Both sides claim the link-up was first mooted through "social contact".

With some analysts questioning whether it might prove a bit expensive for Royal Bank, it will have to deliver substantial savings in the longer term to justify its investment. Mr Goodwin played down any plans it may have to close some of Ulster or First Active's branches although about 75 per cent of their branches in the Republic overlap. The impetus for wide-scale rationalisation is probably tied to what they eventually do with both brands.

Royal Bank has achieved much of its savings by centralising many of the support functions for its various businesses. Much of the group's mortgage business is processed and monitored from one division. Mr Goodwin has said that First Active's mortgages will be brought within its systems which could signal job losses in certain support areas.

For now, the uncertainties surrounding First Active and Ulster Bank are gone. For the other banks though, Royal Bank's expansion poses fresh challenges. It had long been mooted as a potential acquirer of AIB. However, Bank of Ireland, heavily reliant on the Irish mortgage market and facing questions about its strategy, probably has most to contemplate.