Shares of CaixaBank and Bankia rose sharply on Friday after the two Spanish lenders confirmed they were in talks about a possible merger, a merger that would create the country’s largest national bank with assets of more than 650 billion. euros.

Shares of Bankia, the smaller of the two groups, rose 29% early in trading to € 1.34, while Caixa gained 15% to € 2.08, after the groups said they were considering a merger of all stocks, which would result in a combined market capitalization of 16.6 billion euros.

The news also boosted shares of competitors such as Banco de Sabadell and Bankinter, which rose more than 11% and 6% respectively, as investors speculated that a deal could spark a wider wave of deals in the sector. Shares of French Societe Generale and BNP Paribas gained around 5% each, German Commerzbank climbed nearly 8% and Bank of Ireland rose 5.4%.

A combined Caixa-Bankia would become Spain’s largest lender in terms of domestic loans and deposits market share, although it would not have the extensive overseas operations of Santander and BBVA, currently the two largest country’s banks.

The talks come as the coronavirus pandemic exacerbates consolidation pressure on retail banks, forcing lenders already struggling with record interest rates to set aside expensive provisions.

Although the number of banks in Spain has already fallen from 55 to 12 since the 2008 financial crisis, regulators have continued to advocate consolidation as a way to cut costs and improve efficiency.

Pablo Hernández de Cos, governor of Spain’s central bank, said earlier this week that there was “a margin for [banking] mergers that would help strengthen individual lenders and the industry as a whole ”.

José Ignacio Goirigolzarri, president of Bankia, recognized in 2018 that the group could be a “perfect candidate” for several of its rivals.

The pressure has increased this year as the pandemic has prompted forecasts of a sharp increase in defaults. Caixa’s net profit fell 67% in the first half as it made a provision of € 1.1 billion for bad debts related to the pandemic, while Bankia’s net profit fell 64%.

Benjie Creelan-Sandford, analyst at Jefferies, estimated that a Caixa-Bankia combination could reduce the cost base of the smaller lender by up to 40% through branch closures and job losses.

Bankia, with a market value of around 3.9 billion euros on Friday, was bailed out by the state in 2012 thanks to a 22.4 billion euros bailout after suffering property losses during the financial crisis. The Spanish government, which has a stake of just under 62% in the group, wants to recover as much of these funds as possible.

The Economy Ministry said its priority was to “maximize the value of public participation [in Bankia] and strengthen Spain’s financial stability ”and that the country’s bank rescue fund would analyze any potential agreement“ from the point of view of creating value and optimizing the recovery of state aid ”.

Alberto Garzón, the consumer rights minister, told Spanish radio on Friday that the best way to recover the bailout funds if the merger takes place would be for the state to retain a stake in the new bank. Analysts calculate it would still have a stake of around 14% in a larger entity.

Stefan Nedialkov, analyst at Citigroup, said he did not expect government intervention to stand in the way of a deal, saying “a potential transaction would provide the [government] with a more liquid way out of its stake in Bankia without disrupting its value ”. – Copyright The Financial Times Limited 2020

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