LISBON, Sept 9 (Reuters) - U.S. private equity firm Lone

Star is considering a sale as well as an initial public

offering of Novo Banco, Portugal's fourth-largest bank, three

sources with knowledge of the matter said, potentially prompting

more European banking consolidation.

Novo Banco was created in 2014 from the Portuguese

government's bailout of collapsed private bank Banco Espirito

Santo (BES). Since 2017 it has been 75%-owned by Lone Star, with

the Portuguese resolution fund and the state owning the rest.

The bank is now worth around 5 billion euros ($5.55 billion)

based on recent valuations, compared with around 1.3 billion

euros in 2017, the three sources said, speaking on condition of

anonymity because they were not authorized to speak publicly.

Lone Star, Novo Banco and a spokesperson for Portugal's

resolution fund declined comment.

The move to weigh a complete sale rather than just an IPO

comes as Novo Banco has completed a turnaround, which involved

focusing solely on Portugal and becoming profitable.

By running a so-called dual track process, sellers typically

seek to build competitive tension to reach the best price.

Among potential foreign buyers are Spanish banks already

present in Portugal such as Santander and CaixaBank and

French banks such as Credit Agricole and BPCE, two sources said.

However, there have been no formal discussions with any

potential buyers, they added.

Santander, Caixabank, Credit Agricole and BPCE declined to

comment.

An agreement between Lone Star, the resolution fund and the

state to lift a ban on Novo Bank making dividend payouts, in

place since the private equity firm bought its stake, could

kick-start the sale in the coming months, the first source said.

A valuation of around 5 billion euros is around 7 times the

earnings Novo Banco expects for 2024.

Novo Banco's first-half net profit slipped 1% to 370 million

euros, as higher impairments and provisions countered a 13% rise

in net interest income, or earnings on loans minus deposit

costs, to 595 million euros.

Novo Banco has focused on offloading problematic exposures

and its non-performing loans dropped to 4.1% of total loans in

June versus 4.9% a year earlier and 28% in 2017.

($1 = 0.9003 euros)