THE IRISH-LED Mallabraca consortium comprising Irish investors, US private equity firms and Middle Eastern sovereign wealth funds has had contacts with AIB about injecting capital in return for a stake, though the consortium is more actively pursuing a large stake in Bank of Ireland (BoI).

The consortium, led by investors Nick Corcoran and Nigel McDermott of Cardinal Asset Management, and Bryan Turley of Sorrento Asset Management, has been in contact with AIB about a possible investment, though the bank has signalled it can increase its capital levels on its own without having to raise money externally.

A spokeswoman for the bank declined to comment. Mallabraca has not yet made a public comment on its interest in the banks.

Mallabraca wants to invest in BoI, but is also eyeing a stake in a merged group comprising BoI and Irish Life Permanent (ILP), though the immediate focus of its interest is BoI. Talks with BoI are taking place this week. The bank has said it received "unsolicited approaches" from parties wishing to make an investment.

Minister for Finance Brian Lenihan is scheduled to meet the heads of the six State-guaranteed Irish banks and building societies on Friday for more discussions on possible mergers to strengthen the sector. Mr Lenihan has asked the chief executives at the institutions to return to him after reflecting on their discussions last Thursday.

Mr Lenihan said yesterday he had never ruled out State investment in the banks, but that it would be "a last resort". He said the banks had to "demonstrate their capacity to attract private money".

"We cannot characterise foreign investment all the time as predatory . . . if there is private investment in the banks, I will have to ensure that the public interest is served."

Mallabraca includes US private equity firms JC Flowers and the Carlyle Group, New York-based investment bank Sandler O'Neill and two Middle Eastern sovereign wealth funds. Mr Corcoran, Mr McDermott and Mr Turley, who put the consortium together, are also investors in the group.

The consortium is not prescriptive about any potential mergers as a condition of a capital injection in BoI. It is willing to offer the State the opportunity to co-invest, but can also invest on its own. It will offer existing shareholders a chance to invest through a rights issue at a later date.

Dublin stockbroker Merrion is working alongside the consortium, with the firm's corporate finance team, led by Dan Ennis, advising Cardinal Asset Management.

BoI's largest shareholder, activist US fund manager Harris Associates, raised its stake in the bank to 6.05 per cent from just under 6 per cent in share purchases announced on Monday.

Chicago-based Harris Associates, which has described itself as "patient long-term shareholders" in BoI, bought 826,902 shares at between €0.83 and €1.25 last week with a combined value of up to €1 million.

The firm's BoI stake, which was worth €392 million late last year, has a market value of €73 million after BoI fell 8 per cent to €1.22.

David Herro, chief investment officer at Harris, told The Irish Times that he did not believe that the current share price represented "the long-term value" of the bank.

"We acknowledge it is a tough operating environment, but we believe, given the strength of their management and business franchise, that Bank of Ireland will do very well when the economy recovers," he said in an e-mail.

The firm has said it supports the bank's management and that it believes the bank does not need to raise capital. "They are not in screaming need of a capital injection . . . at this stage the company looks fairly well capitalised and can manage itself through the crisis," Mr Herro told RTÉ.