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UPDATE 3-Sabadell expects swift decision on BBVA deal as banking sector shrinks

* Spanish banking sector could shrink to half a dozen lenders

* CEO of Sabadell expects outcome of talks with BBVA within weeks

* Domestic deals offer larger potential cost savings

* Shares in Sabadell rise 3.6%; BBVA falls 6.5% (WWrites through, adds quotes, context and shares)

MADRID, Nov 17 (Reuters) - Spanish lender Sabadell expects to decide on a proposed merger with rival BBVA within weeks, its Chief Executive said on Tuesday, as the sector rushes towards consolidation to contend with pressures on multiple fronts.

Banks across Europe were struggling to cope with record low interest rates even before the COVID-19 pandemic hammered economies the world over, prompting lenders to step up cost-cutting efforts.

BBVA and Sabadell announced on Monday that they were in talks to create Spain’s second-biggest domestic lender by assets, which a source familiar with the matter said is expected to lead to hefty job losses.

“We are at the beginning of the talks, no decisions have been taken. We have initiated due diligence and in the coming weeks we will know what the outcome is,” Sabadell CEO Jaime Guardiola told a conference on Tuesday.

The boards of both banks will decide next month on whether to proceed with a potential merger, a source familiar with the matter told Reuters.

The Spanish banking sector shrank from 55 lenders to 12 after the 2008 financial crisis and could now shrink to as few as half a dozen, two banking sources and several analysts told Reuters.

A BBVA-Sabadell deal would mark another significant step in that consolidation, with Caixabank having agreed in September to buy Bankia.

Rivals Unicaja and Liberbank are also in merger talks.

COST SAVINGS

Spanish bankers emphasised that it is much easier for lenders to generate cost savings and improve profitability through mergers in their domestic market than through cross-border deals in Europe.

“In a domestic deal, synergies are likely to be around 40 to 50 per cent of the costs of the smaller lender in a merger, while in a cross-border deal it is not clear what you can achieve”, Santander Chief Executive Jose Antonio Alvarez told the same conference.

BBVA and Sabadell would have nearly 600 billion euros ($710.52 billion) in Spanish assets and a combined market value of 25.2 billion euros based on Tuesday’s share price, according to Reuters calculations using Refinitiv data.

Shares in Sabadell were up 3.6% at 0.434 euros on Tuesday after leaping 24.6% on Monday, giving it a current market value of 2.4 billion euros. BBVA was down 6.5% at 3.42 euros, equating to a market value of 22.8 billion euros.

Though the deal has been described as a merger, it would effectively be a takeover by the much larger BBVA.

A source familiar with the matter told Reuters that a potential premium to be paid by BBVA was under discussion. Both BBVA and Sabadell declined to comment on any potential premium.

Societe Generale said in a note to clients that the sale of BBVA’s U.S. subsidiary could free up enough capital for BBVA to acquire Sabadell with a meaningful M&A premium, which it estimated could reach about 25%. (Reporting by Jesús Aguado and Emma Pinedo Editing by Ingrid Melander and David Goodman)

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