Investor Alert

Sept. 4, 2020, 2:05 a.m. EDT

CaixaBank, Bankia in merger talks

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By Pietro Lombardi

Spanish banks CaixaBank SA and Bankia SA said late Thursday that they are in talks over a possible merger, in a deal that would create a leading player in the country and would be the biggest merger in the Spanish banking sector in years.

The lenders are discussing an all-share merger, Caixa said, adding that no agreement has been reached "beyond the signature of a non-disclosure agreement for the exchange of information to appraise the transaction, within a due diligence, with advisers for the transaction."

Bankia stressed the preliminary nature of the talks.

The negotiations come at a difficult time for European banks. The economic blow dealt by the coronavirus pandemic, and the provisions banks are setting aside for potential loan losses, have compounded the effects of years of low interest rates, which have hit their core business of making money through loans, making it less profitable.

Regulators in Europe have signaled they are willing to ease some conditions for mergers. The European Central Bank in early July published a draft guide saying that eurozone banks considering M&As will be able to temporarily use internal models to calculate the capital requirements of the merged entity, and will be allowed to use an accounting treatment known as badwill, while the ECB won't necessarily ask for higher capital.

Badwill allows buyers to book a profit if they buy a target for less than its book value. When this happens, the buyer can treat the difference as a gain.

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