DUBLIN, March 14 (Reuters) - State-controlled Royal Bank of Scotland has commissioned investment bank Morgan Stanley to advise it on potential merger opportunities for its Irish unit, Ulster Bank, the business's chief executive was quoted as saying on Friday.
Ulster Bank, which is the biggest bank in Northern Ireland and the third largest in the Republic of Ireland, has racked up losses of 2.5 billion pounds ($4.2 billion) over the past two years.
It accounts for less than 4 percent of RBS's assets but was responsible for 20 percent of its bad debt charges last year.
"We think there may be further consolidation in the market. We're looking to see if Ulster Bank can play a part in that," Jim Brown said in an interview in the Irish Times newspaper.
"There are a number of smaller institutions, without getting into the specifics, and there may be opportunities with those in terms of fulfilling our strategic ambitions, but I couldn't mention specifically who they might be."
RBS's own chief executive Ross McEwan said last month that he wanted to develop Ulster as a challenger to Ireland's biggest two lenders.
Earlier this month The Sunday Times newspaper said a team inside RBS was looking at tie-ups between Ulster and other Irish lenders, such as permanent tsb or the Irish units of Danske Bank or KBC.
At the same time Ireland's finance minister Michael Noonan said he would like a "significant" new bank with a big balance sheet to enter its lending market this year to drive competition in the diminished sector.
Noonan said he was looking at the possibility of overseas banks partnering with Irish lenders to create a competitor to the country's biggest lenders - Allied Irish Bank and Bank of Ireland.
"If you look at the banking market, it's very clear that there's the two pillar banks and there's us. What we're looking to do is to become a more compelling choice in the market," Brown told the Irish Times.
"The government is aware that we are looking at other options. The government has been very clear. They are looking for a third banking force in the market ... There's a lot of work to be done to see if its viable or not."