(Bloomberg) -- The animal spirits look like they’re returning to European banking. 

The announcement by Banco Bilbao Vizcaya Argentaria SA on Tuesday that it wants to begin talks to take over Banco Sabadell SA comes as further evidence that a long hoped-for consolidation in the region’s banking market is accelerating. 

In a subsequent release on Wednesday, BBVA detailed an all-share offer in a letter to Sabadell’s board on April 30, proposing an exchange ratio of one newly issued BBVA share for every 4.83 Sabadell shares. That would give Sabadell shareholders 16% of the combined group and represents a 30% premium to Sabadell’s closing price on Monday before news of the deal moved shares.

The terms would value the smaller lender at about €12 billion ($12.8 billion), according to calculations by Bloomberg. The proposal would slightly reduce CET1 — a key measure of capital strength — by about 30 basis points considering restructuring costs that are estimated at about €1.45 billion before tax, the letter said.

Sabadell’s shares rose as much as 10% on Thursday while BBVA slipped as Spanish markets reopened after a holiday.

While a tie up would not be the transformational, cross-border merger that many bankers and regulators have wanted, it stands to create a lender with more than €1 trillion in assets and a market value close to Banco Santander SA’s current €72 billion valuation. It would give BBVA a profitable UK business as well as enable them to grow their Mexican business.

An unusual confluence of factors has arrived. After almost two years of interest rate hikes, many lenders have reaped record profits that they’re under pressure to put to good use — and buybacks aren’t always the answer. As the focus now turns to when rates will go down again, executives are looking for opportunities to diversify. 

“As we slowly approach the first potential European Central Bank and Bank of England rate cuts, consolidation across the industry will gain front seat,” said Filippo Maria Alloatti, an analyst at Federated Hermes. 

European lenders have seen a 25% increase in 2024 consensus net profit since the start of 2022, spurred by rising interest rates, according to Bloomberg Intelligence. Record profits, including among the Spanish and Italian retail-banking groups that have benefited from the economic growth in Southern Europe, are beginning to shake up established patterns.

This year, Spain, Portugal and Greece — bolstered by booming exports, tourism and lower energy prices — are expected to be among the top performing economies in the euro region, according to the European Commission.

Read More: Sun, Sea and Exports Give South Europe Reason to Feel Smug

BBVA Chairman Carlos Torres now joins UniCredit CEO Andrea Orcel and others openly on the hunt for deals. Orcel’s bank bought the Greek government’s 9% stake in Alpha Bank in October and announced a tie-up in Romania. The Italian has made no secret of the fact that he has billions of euros in spare capital looking to be put to use.

Read More: Orcel’s Money Machine Has $10 Billion to Reshape Europe Banking

French lenders are also on the move, where the eye for transactions goes beyond one-for-one mergers in banking. Earlier this month BNP Paribas SA agreed to buy Fosun International Ltd’s stage in Belgian insurer Ageas for about €730 million. Societe Generale SA disposed of two units within days this month, helping to arrest a slump in its stock price. 

In the wake of the financial crisis a decade and a half ago, Spain experienced a rapid concentration of banks. Lenders in the country cut their number of branches by almost two thirds and the number of staff by over 40% since the end of 2008, according to credit rating firm S&P. CaixaBank acquired Bankia in 2020 and Unicaja bought Liberbank the same year, while Santander took over smaller lender Banco Popular in 2017.

Europe’s bank leaders for years have emphasized the need for transformational deals to stand out in a fragmented market that’s glutted with thousands of smaller, regional lenders. The lack of common deposit protection across the European Union and cumbersome regulations have stymied such efforts across borders. 

The so-called “banking union” project has been stalled for years on the lack of political will — yet even there are some signs of change. Earlier this month European lawmakers approved the first step in a plan to pool insurance for bank depositors.

What Bloomberg Intelligence Says:

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 banking analyst 

(Adds share prices in fifth paragraph.)

©2024 Bloomberg L.P.