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)

By Padraic Halpin

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)