Belgian lender KBC may emerge as a "white knight" for Permanent TSB as merger speculation surrounding the Irish bank gathers momentum in the coming months, according to French brokerage Exane BNP Paribas.

Brussels-based KBC is set to decide next year on the future of its Irish unit, with a sale of the business on the cards if it can’t provide it can grow an “organically profitable bank” or build a captive insurance operation in Ireland. KBC Ireland returned to profit last year, following five years of losses after property crash.

While Exane BNP Paribas analyst Alicia Chung said KBC could be a "credible bidder" for PTSB, given the Belgian group's existing Irish presence, its desire for potential future expansion and excess capital, she argued it would need to see a number of questions answered before seriously considering a move.

“KBC would want clarity on a number of issues first, including; regulatory certainty around its own capital requirements and, as such, the true level of excess capital; [AND] a commitment to maintaining its Irish subsidiary,” said Ms Chung.

She said KBC would also want clarity on the timing of a sale of PTSB’s remaining UK mortgage book, agreed as part of the Irish bank’s EU state-aid restructuring plan last year, but now likely to be delayed until at least next year. Irish political positioning around mortgage rates will also be key, she said.

Minister for Finance Michael Noonan fuelled takeover speculation around PTSB last week when he said he suggested that a "strategic transaction could arise opportunistically at any time involving PTSB that could be in the best interests of the State." PTSB's shares are currently worth a little over a third of the €4.50 price at which it and the Government sold stock in the lender last year.

Royal Bank of Scotland, which owns Ulster Bank, would be "unlikely" to consider buying PTSB given uncertainty over the outcome of Brexit, though private equity funds may be a possibility, Ms Chung said.

Still, Ms Chung downgraded her rating for PTSB to underperform from neutral, having cut her 2018 earnings forecast for the group by 10 per cent to account for the implications of Brexit and net interest margin pressures on the group. Separately, she cut her stance on Bank of Ireland to underperform from neutral, with her 2018 estimates for the group, which has over two-fifths of its loan book in the UK, falling by 22 per cent.