BANKIA 
MADRID (Reuters) - Spain's state-owned Bankia (>> Bankia SA) agreed on Tuesday to acquire Banco Mare Nostrum (BMN), creating the country's fourth-biggest lender amid consolidation in Europe's struggling banking sector.
The new bank will hold around 223 billion euros (197.13 billion pounds) worth of assets, Bankia said.
The two nationalised banks - both formed from the merger of several failed lenders - were bailed out at the height of the financial crisis with around 24 billion euros of public money after heavy losses on property loans.
Bankia Chairman Jose Ignacio Goirigolzarri said the deal would help recover public funds. He did not rule out further divestment by the state in 2017.
The state holds around 67 percent of Bankia and 65 percent of the smaller BMN. After the deal, Spain's bank bailout fund FROB is expected to hold around 66.6 percent of the new lender.
"It was the right timing from a macroeconomic point of view due to the strengths of the Spanish economy and also due to the pace of the current reduction of the unemployment rate," Bankia Chief Executive Jose Sevilla told analysts on a conference call.
Spain's economy grew by 3.2 percent in 2016 and is expected to match that this year, boosted by private consumption, a tourism boom and strengthening exports, and while unemployment remains the second highest in the EU after Greece, job creation is also gaining pace.
BELOW MARKET EXPECTATIONS
The lenders agreed to a 7.8-for-1 share swap deal, valuing BMN at around 825 million euros (729.28 million pounds) or 0.4 times book value, below market expectations of between 0.45 to 0.6 times book value, according to Deutsche Bank and UBS analysts.
In March BMN was valued at over 1 billion euros by an independent adviser selected by FROB.
The state had already injected 1.6 billion euros into BMN.
Bankia shares rose 4 percent on Tuesday. Analysts said the deal made sense because each bank had a different geographic footprint. However, the combined group is expected to shrink as lenders struggle with ultra-low interest rates and competition over lending.
After years of consolidation, the number of lenders in Spain has shrunk to 13 from 55 in 2008 before a housing market bubble burst, triggering an almost five-year economic slump.
Banco Popular, the country's sixth-biggest bank, was taken over by Spain's largest bank Santander (>> Banco Santander) in early June for a nominal one euro after European authorities stepped in to prevent its collapse without the use of public aid.
On Sunday, Italy started winding down two failed regional banks in a deal that could cost the state up to 17 billion euros.
The Bankia and BMN tie-up is expected to increase earnings per share by 16 percent after three years, equivalent to an increase of 245 million euros in net profit in this period, and would be positive after one year.
The transaction is also expected to generate gross cost synergies of 155 million euros a year. The total capital invested will be 2 billion euros, including 1 billion euros for the clean-up of BMN's balance sheet and 300 million euros for restructuring costs.
After the deal is finalised, Bankia expects fully-loaded core capital ratio - a closely watched measure of a bank's strength - of 12 percent by December with a Return on Tangible Equity (ROTE) increase of around 120 basis points.
In a statement to the market regulator, Bankia said it would issue a maximum of 205.7 million new shares to help finance the deal, which is expected to be finalised by the end of this year.
(Additional reporting by Paul Day and Tomas Cobos; Editing by Susan Thomas)
By Jesús Aguado
