By Jesús Aguado and Sarah Morris
MADRID (Reuters) - Spain's largest bank Santander will spend around 260 million euros ($340.84 million) to absorb subsidiary Banesto and will close 700 local branches as it tries to cut longer-term costs.
Spain's banks, hit by a slump in the property market and prolonged recession, are cutting costs and trying to rid themselves of around 185 billion euros of real estate assets. There are concerns the industry may need more financial support as the state struggles with one of the largest deficits in the euro zone.
Santander said its consolidation would generate savings of 520 million euros for the group by the third year of the merger, of which 100 million euros are expected from revenue increases.
Santander, Banesto and unlisted private banking division Banif, which will also be absorbed in the merger, have around 4,664 offices in total. The group's combined market share of branches in Spain would increase from 10 percent in 2008 to 13 percent in 2015, as its branch cuts would be less than the decline across the sector as a whole.
At the end of 2015, Spain will have an estimated 30,000 bank branches, down by 16,000 or 35 percent in eight years.
The move will have a neutral effect on Santander's capital ratios, Santander said.
The buyout of Banesto, of which Santander controls around 90 percent, would add value from the start and increase earnings per share by 3 percent in the third year, Santander said.
"With low liquidity and low volumes in the market, it seems now that delisting it (Banesto) could be attractive for Santander, and at the same time putting everything under the same brand name will eliminate some overhead costs in Spain," said Carlos Peixoto, banking analyst at Portuguese broker BPI.
The reduction in total employment stemming from the branch closures, a sensitive subject in a country where one in four is unemployed, would be implemented gradually, the bank said without providing specific figures.
"This will be achieved by transfers to other units of the Group, in Spain as well as abroad, natural turnover and incentivized departures," the bank said in statement.
In a statement, Santander said the merger valued Banesto shares at 3.73 euros, 24.9 percent more than the closing price on Friday. Shares in Banesto were up 20.5 percent up at 10.43 GMT, while Santander's dropped by 0.95 percent.
Banesto's market capitalization was 2.4 billion euros at current market prices. Banesto was bought by Santander in 1994 for 313 billion pesetas, or around 1.9 billion euros.
Santander said the absorption of Banif, a completely owned unit of the Group, would reinforce Santander's specialized private banking network in Spain.
Banif, whose integrated model of private banking sets it apart from its competitors, has 36 billion euros of assets under management and 550 employees in 52 branches.
Santander Group is the leader in wealth management in Spain, with around 78 billion euros of assets under management. ($1 = 0.7628 euros)
(Additional reporting by Paul Day and Robert Hetz; Editing by Paul Day and Elaine Hardcastle)