"The board of directors believes that a combination of the two companies could offer opportunities for increased operational efficiency and value creation," Islandsbanki said without disclosing any financial details.

Islandsbanki, among the country's three largest banks, said a merger would increase its balance sheet by close to 20%.

Such a deal would be subject to regulatory and shareholder approval.

Kvika banki proposed the merger last week.

(Reporting by Nikolaj Skydsgaard; Editing by David Goodman)