Ireland sees surplus on AIB bailout as repayments begin

* Irish Fin Min eyes 'significantly more' than 21 bln

* Ireland (Other OTC: IRLD - news) to start recouping bailout via preference shares

* State will get close to 4 bln euros ahead of IPO - Fin Min (Adds Finance Minister eyes more than spent on AIB bailout)

By Padraic Halpin

DUBLIN, Nov 6 (Reuters) - Allied Irish Banks (EUREX: 558453.EX - news) (AIB) got a green light on Friday to repay 1.7 billion euros ($1.9 billion) of state bailout funds, kicking off the process of reimbursing the 21 billion euros it received during the financial crisis.

Finance Minister Michael Noonan also said for the first time that he expects the state to recoup more than it invested in the bank, through a series of debt repayments and share sales.

"My expectation, depending on the timing, would be that the taxpayer will get back significantly more than the 21 billion that was invested," he told state broadcaster RTE.

Ireland pumped a total of 64 billion euros into its banks during the crisis, which, at almost 40 percent of annual economic output, was the most expensive rescue in the euro zone.

State-owned AIB's rescue was the biggest bailout given to any Irish bank still trading.

AIB has been in discussions with European regulators about reorganising its capital structure, including how much it can repay the government from the 3.5 billion euros of preference shares it owns in the bank.

Taking account of income due from the bank and 1.6 billion euros worth of state-owned contingent capital notes (CoCos) due to mature next July, Ireland will receive close to 4 billion euros ahead of a potential initial public offering (IPO) next year, Noonan said.

If re-elected early next year, the government plans to sell a 25 percent stake in AIB on the stock market, following the part return to private ownership this year of the much smaller bank permanent tsb.

AIB's CEO said last week that investors see the country's second largest bank by assets as a good play in an economy that is set to be the fastest growing in Europe for a second successive year.

"The approval of these capital actions represents another key milestone in the transformation of AIB and positions the group to repay capital to the state and return to private ownership over time," AIB CEO Bernard Byrne said.

The remainder of the preference shares will convert to equity and the 99 percent state-owned bank said it had agreed to issue at least 750 million euros of Lower Tier 2 (LT2) and 500 million euros of Additional Tier 1 bonds (AT1) to achieve a net increase in its capital levels.

($1 = 0.9200 euros) (Additional reporting by Conor Humphries; editing by Jane Merriman and David Clarke)