Speculation that the two banks have been flirting with each other has been rife for some months and, while the logic of a merger has always been understandable for First Active, doubts have lingered about just what benefits would accrue to Anglo Irish Bank.

Anglo is an aggressive and highly successful bank, which has concentrated on building a strong presence in the small and medium-sized business markets.

Its most recent acquisitions have focused on adding fund management and deposit-taking activities in Ireland and overseas, and it has expressed a desire to continue with this strategy.

It is in this context that the negotiations with First Active are a new departure for Anglo.

Its chief executive, Mr Sean Fitzpatrick, and his management team are now braced to enter the highly competitive mortgage market at a time when profit margins are under most pressure.

More significantly, they have chosen to do this by linking up with a company that still has a relatively high cost base and an extensive branch network even after substantial rationalisation. In an age where banks are increasingly moving to reorganise their delivery channels so that more business can be done over the Internet and by telephone, would a more direct entry into this market not be more prudent?

First Active does offers Anglo Irish Bank access to its deposit base though, which at the end of last year stood at €111.1 million, and the combined businesses would hope to secure a broader platform from which both can grow and prosper.

Both banks do need greater scale in a sector where consolidation is the order of the day and most analysts accept that First Active could be a good business if it was restructured and managed properly. Anglo's management team is very highly regarded and ultimately this will be the selling point for investors.

Mr Fitzpatrick is expected to assume the chief executive's role and quickly put his imprint on the entire business. There is little doubt that First Active will require further rationalisation if the group's cost/income ratios are to be more closely aligned. The discussions still have some way to go before the deal is concluded.

Issues such as the structure of the new board of directors and the new management team will have to be resolved.

The news should help to diffuse tensions at First Active's forthcoming annual general meeting, offering its shareholders the first hint of optimism in a long time.