A new round of mergers could take that total down to just single digits, putting the country on a par with Britain and France. It would also cut a swathe through a still bloated retail banking network that, according to the Bank of Spain, had the most branches per capita in Europe as recently as 2013.

"Business volumes are simply not high enough to sustain the sector at its current size," Jose Carlos Diez, economy professor at Alcala de Henares University near Madrid, said.

The banks that are the most likely targets in this process are below the top tier in Spain, where Santander and BBVA, the two largest, were able to ride out Spain's economic crisis partly because of the international spread of their businesses.

The biggest among the handful of banks now under threat is Banco Popular, senior banking sources said.

The bank is ranked sixth by domestic assets but is weighed down by low profitability and heavy exposure to property loans that turned sour during the crisis.

Popular has been racing to grow abroad, with purchases announced in the United States and others expected in Mexico or Portugal. But such small-scale deals may not be enough to prevent it being swallowed up, a senior Spanish bank executive said.

Former savings banks such as Liberbank, and unlisted BMN and Ibercaja will also be under the microscope from mid-2016, when analysts and economists expect the merger activity to kick off again as margin pressures on the industry increase.

Before the crisis, which led to a 41.3 billion euro ($44.80 billion) restructuring of Spain's banking industry, the volume of credit flowing from the banks to the economy was close to 2 trillion euros and the banks' average profitability, or return on equity, was 20 percent.

After the crisis, the volume of credit has shrunk by 500 billion euros and return on equity dropped to a third of what it was, well below the banks' cost of capital.

As of March, Popular has a return of equity of less that 3 percent and a cost of capital of 10 percent. It also has soured real estate assets of more than 27 billion euros, which are proportionally the highest in Spain at around 25 percent of total loans.

But the bank's strong small business portfolio may attract suitors with Caixabank, Spain's biggest bank by domestic assets, high on the list.

Caixabank is strong in retail banking and made an informal approach to Popular in 2012.

"Popular would complement it well given its corporate business and by giving it access to Galicia, where (Caixabank) has a smaller presence," one investment banker said.

Caixabank declined to comment.

Caixabank's business plan to 2018 does not include acquisitions, but CEO Gonzalo Gortazar has said it would consider any opportunities during "the second round of consolidation."

Popular has said it wants to stay independent.

BBVA, Spain's second biggest bank by total assets, has already played a major role in consolidation since the crisis buying two small former savings banks in the northeastern region of Catalonia in the last three years. Santander has said its aim is to grow organically, but as the euro zone's biggest bank by market value it has the financial muscle to play a major role.

MID-SIZED MORSELS

Banking experts predict the new wave of mergers will kick off in about a year, when banks will no longer be able to benefit from a fall in financing costs that result from the low interest rate environment. Consultancy Analistas Financieros Internacionales (AFI) estimates this could save the sector around 5 billion euros.

"2016 will be problematical because no one will benefit from the lower cost of financing deposits," AFI partner Paula Papp, referring to the fact that they have already fallen sharply and are close to bottoming out.

Under that scenario, those of Spain's remaining savings banks with low profitability and high levels of bad debts will be vulnerable.

In addition, a gradual recovery in Spain's credit market -- the rate of decline in credit volumes slowed to 0.2 percent in May -- has coincided with more competition, squeezing margins.

"This is probably ushering in a phase of consolidation that could affect the likes of Liberbank, BMN and Ibercaja," Diez said.

(Writing by John Stonestreet. Editing by Jane Merriman)

By Jesus Aguado