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UPDATE 1-Bank of Spain chief calls for more banking mergers to cut excess capacity

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MADRID, Oct 6 (Reuters) - Bank of Spain governor Pablo Hernandez de Cos on Tuesday called for further banking consolidation in Spain and other European countries to shore up profitability as he warned against keeping lenders with excess capacity alive.

Banks are under pressure in Europe to engage in deals at a time when they are coping with rising bad loans amid the coronavirus pandemic and ultra low interest rates.

Spain is one of the countries with the highest number of branches per 100,000 adults in the world, with nearly 50, compared with Italy’s less than 39 and Germany’s 11, according to 2019 International Monetary Fund data.

“It makes no sense, it is even dangerous to maintain alive lenders with excess capacity,” said De Cos, who also sits on the European Central Bank’s governing council

De Cos told lawmakers mergers would also be desirable in other European countries and said the lack of cross-border mergers in Europe reflected lower potential cost savings compared to similar transactions at a national level.

Last month’s all-share deal between Caixabank and Bankia to create Spain’s biggest domestic lender created expectations of a new wave of mergers and acquisitions among Spanish banks, whose numbers have already fallen to 12 from 55 after the 2008 financial crisis.

De Cos dismissed lawmakers’ worries such a deal would create a bank to big to fail and make the sector less competitive.

“They would have a significant size but would not (much) more than other lenders, we have a legislation that immediately adapts the solvency requirements to that size,” De Cos said.

On Monday, Spanish lenders Unicaja and Liberbank confirmed they were in conversations about a potential tie-up to create the country’s fifth-biggest lender.

Expectations of further deals in the sector in a bullish market were lifting banking stocks across Europe. (Reporting by Jesús Aguado and Emma Pinedo Editing by Tomasz Janowski)