THE GOVERNMENT could end up with a stake of as high as 60 per cent of a larger mutual comprising the Educational Building Society (EBS) and Irish Nationwide Building Society, according to EBS chief executive Fergus Murphy.

Mr Murphy said that a deal may be agreed early next year and that the Government may take a stake of between 40 and 60 per cent in return for a State capital injection of up to €400 million in the enlarged building society.

Speaking to reporters at the annual conference of the Association of Compliance Officers in Ireland (ACOI) in Dublin, Mr Murphy said discussions between EBS and Irish Nationwide were likely to begin this week.

He believed that an agreement could be reached by Christmas or early next year.

“You would like to think that we could move this on quite quickly,” said Mr Murphy, adding that capital injections by the Government would have to be made as EBS and Irish Nationwide transfer a combined €9.1 billion in loans into the National Asset Management Agency (Nama) early next year.

The Minister for Finance, Brian Lenihan, also attending the conference in Dublin, said that Irish Nationwide’s board had indicated at a recent meeting with him that it had an interest in talks with EBS.

Mr Lenihan said he would await the outcome of their discussions before assessing the capital requirements of both institutions.

“It is clear from the quantity of assets which both Nationwide and EBS have to transfer to the National Asset Management Agency that the State may well end up being a substantial shareholder in any resulting building society,” he said.

Irish Nationwide chief executive Gerry McGinn told staff in an e-mail yesterday that he expected “formal discussions will get under way later this week”.

The building society’s chairman, Danny Kitchen, had written to EBS acting chairman Philip Williamson “to outline how best to proceed to formal discussions”, he said.

Irish Nationwide is transferring about 80 per cent of its loan book – €8.3 billion of loans – to Nama, while EBS is selling in the region of €800 million of its €17 billion loan book.

The Minister declined to comment on whether Permanent TSB, the banking division of Irish Life Permanent, would form a larger group with the building societies.

Mr Murphy said Permanent TSB could “certainly become part of it”, but that the initial focus would be on a transaction between EBS and Irish Nationwide.

Mr Lenihan said all deposits in any new merger would continue to be guaranteed by the Government. “We want to see a viable building society continuing to provide credit to the Irish economy to those who want to buy houses – that is important in terms of the overall banking landscape,” the Minister told reporters.

Mr Murphy said EBS would need an additional €300 million, depending on the international norms set for capital levels.

He expected €50-€100 million more would be required to cover the €2 billion in residential loans that may be transferred to EBS from Irish Nationwide.

The capital requirements would be determined by the risk weighting of Irish Nationwide’s loans to be transferred, he said, adding he believed some 30 per cent of the building society’s residential loans were buy-to-let and may be higher-risk loans.

A takeover by EBS of Irish Nationwide’s remaining €2 billion in residential loans must be carried out through a transaction known as “a transfer of engagements”.

Mr Murphy said EBS would need to hold a special general meeting to seek the approval of members to sell “a special investment share” to the Government in return for the capital investment.

EBS has retained NCB Corporate Finance and KPMG as advisers on the discussions, while Arthur Cox and AL Goodbody are advising on legal issues.