UPDATE 1-Spain's Unicaja, Liberbank aim to agree on merger as soon as next week, sources say

(Adds shares, merger ratios with current market valuations)

MADRID, Dec 18 (Reuters) - Unicaja and Liberbank aim to agree on a proposed merger to create Spain’s fifth-biggest lender as soon as next week, three sources with knowledge of the matter said on Friday.

European banks are under pressure to join forces to deal with rising bad loans, low interest rates and the COVID-19 pandemic, and the combined Spanish entity would have almost 109 billion euros ($129.5 billion) in assets and a combined market value of 1.95 billion euros, according to Reuters calculations based on Refinitiv data.

“Negotiations on the financial terms of the proposed deal are at an advanced stage and could be finalised as soon as next week or before the end of the year,” one of the sources said.

Two of the three sources told Reuters that Liberbank and Unicaja held regular board meetings this week but no decision was taken, with one adding that extraordinary board meetings to decide on the terms of the proposed deal could be called “at any moment” from Monday onwards.

The second source, who did not rule out the process extending into early 2021, said some final details were still being negotiated.

The third source familiar with the matter said current discussions on an all-share swap ratio pointed to Unicaja taking a stake of around 59% in the combined lender.

Unicaja and Liberbank, which would both need to sign off on the final ratio, declined to comment.

Unicaja, with 62 billion euros in assets and a market value of around 1.14 billion euros, and Liberbank, with assets of 46.8 billion euros and a capitalisation of close to 810 million, called off earlier merger talks last year after failing to agree a share swap.

Based on the current market valuations, Unicaja would hold 58.5% of the combined lender, while Liberbank would hold 41.5%, broadly in line with the numbers given by the third source and compared to a 57%/43% split indicated by their total assets in September, just before news of the possible merger emerged.

Since then Liberbank shares have risen around 17% and Unicaja’s by about 10%.

Spain’s banking consolidation suffered an unexpected blow at the end of November when BBVA and Sabadell called off merger talks.

However, shareholders of state-owned Bankia and Caixabank earlier this month approved a merger to create Spain’s biggest domestic lender.

The Unicaja-Liberbank deal would reduce the number of Spanish lenders to 10, already accounting for the Bankia-Caixabank deal - from 55 before the financial crisis in 2008. (Reporting by Jesús Aguado, editing by Andrei Khalip, Kirsten Donovan)