UPDATE 1-Spain's Unicaja, Liberbank to approve merger at Tuesday board meetings, source says

(Adds detail on advanced merger talks)

MADRID, Dec 28 (Reuters) - Spanish lenders Unicaja and Liberbank are expected to hold board meetings on Tuesday to approve the terms of their proposed merger to create Spain’s fifth-largest bank by assets, a source with knowledge of the matter said on Monday.

“Extraordinary board meetings are expected to sign off on the deal on Tuesday after both lenders agreed in principle on the financial terms and the future management of the combined group,” the source said.

A second source aware of the talks said that the plan was to sign off on the deal before the end of the year and that negotiations were at an advanced stage, although board meetings had not been officially called yet.

The two banks, which have around 109 billion euros in combined assets ($129.5 billion), declined to comment.

Banks in Europe are grappling with record low interest rates and the economic impact of the pandemic is forcing them to make further cost cuts, on a standalone basis or through tie-ups.

Under the agreement, Unicaja would get 59.5% of the combined lender and Liberbank 40.5%, the first source said.

Unicaja, with 62 billion euros in assets and a market value of 1.145 billion euros, and Liberbank, with assets of 46.8 billion euros and a value of 795 million euros, have agreed on establishing the headquarters of the combined bank in Malaga and on the management of the combined bank.

Unicaja’s 73-year-old chairman Manuel Azuaga would serve as executive chairman for the next two years while 61-year-old Liberbank CEO Manuel Menendez would the chief executive officer, the source said.

After two years, Azuaga would step aside, after which the chairmanship of the bank won’t have an executive role anymore, while the post of CEO will be revaluated, the source familiar with the matter said.

As of last Thursday, shares in Liberbank had risen 7.3% after news of the possible merger emerged at the beginning of October, while Unicaja had gained 11.6%.

On Monday, shares in Liberbank were up 3.1% to 0.2670 euros, while Unicaja rose 3.4% to 0.7110 euros, leaving them with a combined market value of 1.94 billion euros, Reuters calculations based on data from Refinitiv showed.

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

This month, shareholders of Caixabank and Bankia approved a merger. (Reporting by Jesús Aguado, editing by Andrei Khalip and Jason Neely)