(Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA has told Banco Sabadell SA that it’s interested in exploring an acquisition, in what could be one of the largest European banking deals in years.

BBVA has appointed advisors and it has conveyed to Sabadell’s chairman its interest “in initiating negotiations to explore a potential merger transaction between the two entities,” it said in a regulatory filing Tuesday. Sabadell confirmed in a separate release that it has received an “indicative written proposal.”

BBVA’s deal interest comes a little over three years after short-lived talks between the two lenders about an all-stock combination fell apart due to disagreements over valuation. A combination would create a Spanish banking behemoth to rival the country’s largest lender, Banco Santander SA.

BBVA has a market capitalization of about €60 billion ($64 billion) while Sabadell is worth about €10 billion. That compares with a market valuation of just over €70 billion for Santander.

Read More: BBVA, Sabadell End Takeover Talks in Disagreement Over Price

Sabadell shares jumped as much as 7.8% on the news, while BBVA declined as much as 7.7% in Madrid trading. 

“The shares reaction is justified as the market bets on a transaction price higher than yesterday’s closing, while BBVA falls reflecting the need to carry out a capital increase to be able to finance the operation,” Renta 4 bank analyst Nuria Alvarez said. “We understand the operation could be financed with part of the excess capital BBVA has and another part with a capital increase for a share exchange.”

The combination would make sense for BBVA as it would allow the lender to bolster its Spanish corporate business and give it “exposure” to the UK, Alvarez said.

What Bloomberg Intelligence Says

BBVA’s exploration of a merger with Sabadell could face challenges to generate incremental return on capital, despite the latter trading at a more than 30% discount to the former, based on price-to-book. BBVA aims to deliver a high-teens return on tangible equity this year, while Sabadell targets 12%-plus. The combined entity would have a domestic mortgage market share not too far behind CaixaBank. The size of BBVA’s offer and TSB’s strategic options may be critical factors.

Lento Tang, BI analyst

The talks happen as some Spanish banks post record revenue after a decade of restructuring. Earlier Tuesday, Santander reported a 10% jump in first-quarter income, while BBVA on Monday raised its full-year profit guidance.

Spain is a hotbed for domestic banking consolidation in Europe, especially among smaller lenders. Bigger deals are rare in the industry, with the exception of UBS Group AG’s emergency purchase of rival Credit Suisse last year.

Sabadell has long been seen as either a takeover target for its three larger Spanish rivals —  Santander, CaixaBank SA and BBVA — or a consolidator of smaller peers in the country. At the time when the talks fell through, Sabadell was facing widespread issues with its UK unit TSB, which it has since turned around. 

Tuesday’s statement confirmed an earlier report by Sky News.

--With assistance from Thomas Gualtieri, Vinicy Chan and Dinesh Nair.

(Adds Bloomberg Intelligence analysis.)

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