The boards of Unicaja and Liberbank approved on Tuesday a merger in which Unicaja will fully absorb its rival to create a bank with 110 billion euros in assets.

The merger - part of a consolidation process in the banking industry in Spain and Europe more broadly - will bring Spain's number of banks to 10, down from 55 prior to the 2008 economic crisis.

Unicaja will grant 1.075 billion new shares to the holders of Liberbank as part of the deal, brokerage Jefferies said, noting that the offer was a 5% discount from Liberbank's closing price on Tuesday.

Credit deterioration due to COVID-19 is set to represent 0.8% of the merged bank's pre-tax loans, Liberbank CEO Manuel Menendez told reporters on Wednesday, while Unicaja's chairman Manuel Azuaga added the pandemic would impact them less than other banks.

Shares in Unicaja rose more than 4% in early trade on Wednesday before slipping to trade 0.7% lower, while shares of Liberbank were down 4.4%.

The merger will allow the combined bank, the country's fifth biggest in terms of assets, to save 192 million euros annually and reach a capital ratio of 12.4% following 1.2 billion euros of costs related to the merger, the banks said.

The merged entity expects to cut costs by 29 million euros in 2021 and hit the full 192 million euros in 2023, Menendez said on Wednesday.

"Our new size will allow the merged entity to better access capital markets and comply with the requisites of financial authorities," Unicaja's Azuaga said on Wednesday, referring to an economic environment pressured by low interest rates and digital transformation.

Asked about future acquisitions, both executives said that while their priority was the current merger, the new entity would be open to any alternatives generating value for shareholders.

The combined bank aims for a return on tangible equity of around 6% in 2023 and will seek a dividend payout ratio of 50% including cash and buybacks, Menendez said.

Italian bank Mediobanca advised Unicaja on the deal, while Deutsche Bank advised Liberbank.

The deal follows the approval of a merger earlier this month between state-owned Bankia and Caixabank to create the largest domestic lender, and marks an acceleration of the sector's consolidation after BBVA and Sabadell called off merger talks last month.

($1 = 0.8142 euros)

(Reporting by Clara-Laeila Laudette and Inti Landauro; editing by Barbara Lewis and David Evans)

By Clara-Laeila Laudette and Inti Landauro