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Financials

UPDATE 2-Spain's Sabadell has held informal discussions on potential tie-ups, sources say

* Caixabank/Bankia merger plan kicks off new consolidation wave

* Sabadell held informal contacts with BBVA, Santander - sources

* Sabadell has not initiated merger negotiations - sources

* Analysts see BBVA as more likely buyer

* Authorities are promoting deals in Spain (Adds source, quotes, details)

MADRID, Sept 10 (Reuters) - Spain’s Sabadell has held exploratory talks over the summer with BBVA and Santander about a potential tie-up without entering into formal negotiations so far, four sources said, in a further sign of consolidation in the Spanish banking sector.

All-in share talks between Caixabank and Bankia announced last week have created expectations of a new wave of mergers and acquisitions among Spanish banks, whose numbers already shrank from 55 to 12 after the 2008 financial crisis.

Sabadell has been widely tipped to become one of the next lenders to be involved in a deal, with its shares up around 18% since the Caixa-Bankia deal was announced last week.

Sources with knowledge of the matter told Reuters that Sabadell had been holding informal talks with several lenders in recent months regarding a potential tie-up, with two sources saying there had been contacts with Spain’s second-biggest bank BBVA and two others mentioning Santander.

“Negotiations have not been initiated with anyone but contacts have been taking place, including with BBVA and Santander,” a banking source said, without giving more details on what the contacts entailed, beyond saying they have been going on and off over the summer.

BBVA is seen by bankers as the most likely to be interested in a deal, given Santander bought Spain’s Popular Bank in 2017 and is largely focused on growth in emerging markets.

A source with knowledge of the matter said that Santander was not actively looking into investing more in Spain.

Sabadell, BBVA and Santander declined to comment.

A financial consultant, aware of contacts between Sabadell and BBVA for some time, said BBVA could also take over a smaller lender at the same time.

At current share prices, Sabadell has a market value of around 2.2 billion euros ($2.6 billion).

A deal in 2015 to buy UK lender TSB from Lloyds Banking Group has ended up costing Sabadell millions after a botched transfer of a technology system caused an IT meltdown in April 2018. Shares in Sabadell have lost close to 80% of their value since then.

“The Caixabank-Bankia deal is putting Sabadell under enormous pressure and in Spain it’s basically just Santander and BBVA who have the capacity to raise capital to do such a deal,” a former senior executive of one the five biggest lenders said.

“It’s a question of who is more willing of the two big Spanish giants to take the initiative,” the former senior executive said.

Even before the pandemic struck, low interest rates eating into margins had stoked speculation Spanish banks would need to consolidate further.

NEW SPANISH BANK LANDSCAPE

Before the Caixabank merger plan was announced, Bankia had been seen as a potential partner for Sabadell, with chairman Josep Oliu mentioning last year the possibility of a merger with the lender. Sabadell as recently as this summer maintained informal talks with the state-owned lender, a banking source said.

More flexibility from the European Central Bank regarding capital requirements could pave the way for more consolidation and potentially reduce the total number of lenders in Spain to about half a dozen, putting the country on a par with Britain, two banking sources and several analysts told Reuters.

“The number of banks will go below 10 for sure, but that’s not the question. The question is whether there will remain six lenders or maybe even only four,” said Nuria Alvarez at Madrid brokerage Renta 4.

This would also significantly reduce a retail banking network which the ECB and International Monetary Fund say is still oversized.

Spain is one of the countries with the highest number of branches per 100,000 adults in the world, with 49.66. Italy and France had ratios of 38.79 and 34.27, respectively, while Germany’s ratio was 10.97, according to end-2019 IMF data.

Fernando Rojas, a consultant at the independent think-tank Analistas Financieros Internacionales (AFI), said that with credit falling and non-performing loans expected to rise, volumes were not enough to sustain an oversized banking sector.

“There has to be a qualitative leap in digital banking and they will have to hire engineers to compete in data with technology firms,” Jose Carlos Diez, economy professor at Alcala de Henares University near Madrid, said.

$1 = 0.8420 euros Reporting by Jesús Aguado Editing by Ingrid Melander, Rachel Armstrong and Susan Fenton

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