UPDATE 3-Santander to absorb Banesto unit and close branches
* Santander to spend 260 mln euros in all-share deal
* Santander says to close 700 branches over 3 years
* Bank says to generate 520 mln euros in savings by third year
* Banesto shares climb more than 20 pct, Santander 1 down (Adds with quotes from Santander's CFO)
By Jesús Aguado and Sarah Morris
MADRID, Dec 17 (Reuters) - Spain's largest bank Santander will call an end to the 110 year-old Banesto brand as it fully absorbs its local subsidiary to cut longer-term costs, closing 700 branches.
The all-share deal will cost Santander around 260 million euros ($340.84 million) and will include merging unlisted private banking division Banif. Together the three brands have around 4,664 offices in Spain.
"We have a significantly different context, with a strong concentration in the sector and we are in a market with low growth rates," said Santander's Chief financial officer Jose Antonio Alvarez, explaining the move to cut costs.
Job losses stemming from the branch closures, a sensitive subject in a country where one in four is unemployed, would be implemented gradually, the bank said, without giving details.
Banesto, currently the country's seventh biggest lender with 100 billion euros in assets, had 8,303 employees at the end of September.
Santander, which expects to close the deal to buy out the 10 percent of Banesto it does not already own next May, said the integration would generate savings of 520 million euros for the group by the third year of the merger.
"It's the right decision to try to cut costs in a market where revenues are barely growing and with Banesto trading at cheap mutiples or 0.4 times book value it makes sense," said Juan Pablo Lopez, analyst at Portuguese broker Espirito Santo.
The name Banesto, founded in May 1902, will disappear in three years. The lender was bought by Santander in 1994 for around 1.9 billion euros.
Spain's banks, hit by a slump in the property market and prolonged recession, are having to cut costs and trying to rid themselves of around 185 billion euros of toxic property assets. Still there are concerns that the industry may need more support as Spain has one of the highest deficits in the euro zone.
In June, Spain was granted a European credit line of around 100 billion euros, of which they have accepted around 40 billion euros to date, to help shore up the balance sheet of its weaker savings banks hit by the burst of a decade-long housing bubble.
Santander, the euro zone's biggest bank by market capitalisation, is one of the strongest capitalised banks in Spain, with a core capital ratio above 10 percent at the end of September.
The bank said it would carry out the merger through a swap of its own treasury shares for Banesto shares, valuing the latter at 2.56 billion euros or 3.73 euros a share, 24.9 percent more than the closing price on Friday.
Banesto shares closed up 18.43 percent bringing its total market value to 2.4 billion euros, while Santander dropped 1.19 percent.
Santander's Alvarez said decisions about which branches will close will be based on efficiency and Banesto branches would not necessarily take the brunt of the closures.
The Santander group's combined market share of branches in Spain would increase from 10 percent in 2008 to 13 percent in 2015, as its b r anch cuts over the next three years would be less than the forecast decline in the sector.
Santander said the absorption of Banif, a completely owned unit of the Group, would reinforce Santander's specialised private banking network in Spain.
Banif, whose integrated model of private banking sets it apart from its competitors, has 36 billion euros of assets under management and 550 employees in 52 branches.
Santander's share value has risen over 10 percent this year but is still lagging behind some of its European peers due to the uncertainty which has surrounded Spanish banks lately.
The full buyout of Banesto would add value from the start and increase earnings per share by 3 percent in the third year, Santander said.
($1 = 0.7628 euros) (Additional reporting by Paul Day, Robert Hetz and Tomas Cobos; Editing by Paul Day and Elaine Hardcastle)