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UPDATE 3-Ireland's banking sector down to two big players as NatWest exits

* Third largest lender exits already concentrated market

* AIB, PTSB in talks over corporate, SME, retail loans

* Government says talks “potentially important development” (Adds source on PTSB talks, additional fin min quotes)

DUBLIN, Feb 19 (Reuters) - Ireland’s finance minister said the banking landscape would be poorer as a result of NatWest’s decision to exit, a move that leaves the country with just two major lenders as rivals begin to pick over the remains of Ulster Bank.

NatWest announced on Friday it was winding down its under-performing Ulster Bank business in the Irish Republic, where it is the third-largest lender with an estimated 15% share of the mortgage market, around 10% of the SME market and a 20 billion euro ($24.2 billion) loan book.

Allied Irish Banks (AIB) said that it has entered a non-binding agreement with NatWest to buy around 4 billion euros of corporate and commercial loans. Mortgage lender permanent tsb (PTSB) said it is in early talks to buy some retail and small- and medium-size enterprise assets, liabilities and operations.

The exit by a string of foreign banks a decade ago following Ireland’s banking crash made AIB and Bank of Ireland the dominant players in a market former European Central Bank President Mario Draghi once described as a “quasi-monopoly”.

“The Irish banking landscape will be poorer for the loss of Ulster Bank after all these years,” Finance Minister Paschal Donohoe said in a statement, adding that the government needed to reflect on why such a large bank present in Ireland for over 160 years had departed.

Donohoe described the talks with rivals as a potentially important development but that there were “many, many bridges to cross” when asked if 75% state-owned PTSB would need more government funds for any transaction.

PTSB is in talks to acquire a “significant majority” of Ulster’s 14 billion euro mortgage book, around 700 million euros of SME loans and some of its 88 branches, a source familiar with the process told Reuters.

The Irish Times first reported a breakdown of the possible deal that would almost double the size of PTSB’s assets. PTSB did not comment beyond its statement that talks were at an early stage.

PTSB’s shares jumped 12% by 1352 GMT, while shares in AIB, in which the government also retains a 71% stake following the 2008 crash, were up 3.8%.

COMPETITION CONCERNS

At a news conference, Donohoe highlighted the potential role PTSB could play in taking over some of Ulster’s retail banking functions to help partly allay competition worries.

Ireland’s central bank has raised particular concerns over the lack of competition in lending to small businesses.

Despite the country’s booming pre-pandemic economy, banks have struggled to grow their loan books following years of repayments and redemptions exceeding improving new lending. Analysts say loan purchases would boost their profitability.

NatWest, which employs 2,800 people in Ireland, has a preference to sell the loans to Irish banks, Chief Executive Alison Rose told reporters, but she declined to rule out sales to private equity firms.

Investment firms Cerberus and Lone Star have been reported to be interested in parts of the loan book. Opposition parties and unions in Ireland said sales to non-bank entities would further damage the sector.

The Finance Services Unions said the timing of the exit in the middle of a pandemic was “totally unacceptable” and that staff must have the option of transferring alongside the loan books.

AIB said its agreement included the transfer of employees directly involved in the day to day management of the loan book. ($1 = 0.8258 euros) (Additioanl reporting by Lawrence White and Iain Withers in London; Editing by David Evans and Susan Fenton)

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