Spanish bank CaixaBank has announced that it intends to acquire state-owned bank Bankia in an all-share deal. The merger is expected to create the country's largest domestic lender, which has been seen by some as a start of further consolidation in the European Union's struggling banking sector.

The transaction values Bankia, which was previously bailed out by the Spanish government in 2012, at around $5.1 billion. According to both companies, the deal should result in cost savings of more than $911.8 million per year. The combined entity will have a total customer base of more than 20 million, accounting for about 25 percent of all loans and deposits in Spain.

The merged company will control total assets of about $786.6 billion, making it the largest lender in Spain's domestic market. It will, however, not be the country's largest bank as that title belongs to Santander and BBVA, which both have extensive overseas operations and assets.

"We will become the leading Spanish bank at a time when it is more necessary than ever to create entities with significant size," Bankia's chairman, José Ignacio Goirigolzarri, mentioned in a press release.

The two banks noted in a joint statement that the deal does make a lot of strategic sense given the industry's falling profitability amid the economic crisis caused by the coronavirus pandemic. Analysts have noted that more consolidations would be just over the horizon in the region as the overcrowded sector struggles to remain in the green.

Apart from CaixaBank and Bankia, other deals that are currently being negotiated include the possible merger between Swiss bank UBS and its rival Credit Suisse. Germany's largest lender Deutsche Bank is also still in talks with Commerzbank for possible consolidation.

Analysts at Jeffries point out that the only clear way to improve profitability for European banks is to take advantage of the benefits of scale and synergies gained from a merger. The move to consolidate more financial institutions has seen the support of European regulators. In July, the European Central Bank stated that it would like to see more consolidations in the sector to reverse the industry's dwindling income.