BBVA and smaller rival Sabadell said on Monday they are in talks to create Spain's second-biggest domestic lender by assets, the latest move in the accelerating consolidation of the Spanish banking sector.
A BBVA/Sabadell merger would mark a significant step in this process, coming after Caixabank agreed in September to buy Bankia for 4.3 billion euros ($5.10 billion).
If a BBVA/Sabadell deal goes ahead, the new bank would have nearly 600 billion euros in assets in Spain and a combined market value, based on Monday's closing share prices, of 26.7 billion euros, Reuters calculations using Refinitiv data showed.
Taking into account both banks' international businesses, but deducting the upcoming sale of BBVA's U.S. division, a merged group would have around 860 billion euros in total assets, still below Santander's 1.5 trillion euro global balance sheet.
Banks across Europe are struggling to cope with record low interest rates, and the economic downturn sparked by the coronavirus pandemic is forcing them to focus on further cost cuts, on a standalone basis or through tie-ups.
Both BBVA and Sabadell said the talks were ongoing and said no decision had been made on whether a transaction would go ahead.
"The entities have initiated a reciprocal due diligence review process as is customary in this type of transactions and have appointed external advisers," BBVA said in a stock exchange filing.
"It is noted that no decision has been made in relation to the potential merger transaction and that there is no certainty as to whether any such decision will be made or, if that is the case, as to the terms and conditions of a potential transaction."
Sabadell's own statement confirmed the talks and said it had initiated a due diligence process and designated external advisers.
The boards of both banks will decide next month on whether to proceed with a potential merger deal that they say they are discussing, a source familiar with the matter told Reuters.
The premium to be paid by the larger BBVA is currently under discussion, the source said, adding that BBVA was not considering a capital increase to fund the deal, which could be in cash or shares.
BBVA and Sabadell both declined to comment on this.
Shares in Sabadell rose 24.6% to 0.419 euros on Monday, leaving it with a market value of 2.35 billion euros, while shares in BBVA rose 15.3% to 3.658 euros, reaching a market value of 24.35 billion euros.
Later on Monday, El Confidencial reported that BBVA had hired JP Morgan for a potential deal with Sabadell, while Sabadell had hired Goldman Sachs in July to explore strategic options, including a potential M&A deal. Both JP Morgan and Goldman declined to comment.
Earlier on Monday, BBVA said it had agreed to sell its U.S. business to PNC Financial Services Group for $11.6 billion in cash, prompting speculation, soon confirmed, that BBVA could potentially use the money to buy a smaller rival.
Two other Spanish banks Unicaja and Liberbank are also in talks, in what would create Spain's fifth-largest lender with more than 100 billion euros in assets.