UPDATE 2-Spain's BBK, Kutxa rush through merger amid crisis

(Adds detail on Castillan banks' merger plans)

By Jesus Aguado and Ben Harding

MADRID, Oct 30 (Reuters) - Spanish savings bank BBK and Basque Country rival Kutxa are to merge, the two said on Thursday, clinching a widely expected deal accelerated by the financial crisis.

"The current situation (in financial markets) now makes a merger more necessary," said a spokesman for San Sebastian-based Kutxa.

The global financial crisis has hit unlisted savings banks, known as cajas and controlled by regional governments, harder than Spain's big banks and forced them to consider mergers.

Listed banks like Santander (SAN.MC) and BBVA (BBVA.MC) have less exposure to struggling property developers and Spain's sagging real estate market.

"Although the merger between BBK and Kutxa has been going on for some time the reason to try and rush it now is to weather the financial crisis," a senior banking source told Reuters. "The same will happen with other mergers in the savings bank sector".

The new bank, which will be Spain's sixth-biggest caja with 50 billion euros ($65.28 billion) of assets, could grow even bigger with the possible incorporation of the Basque Country's third savings bank, Caja Vital, BBK said.

Bilbao-based BBK said the merger, which has to be approved by both banks' shareholders, would reinforce the institutions' financial strength "in a difficult economic and financial climate, characterised by a strong rise in bad loans and a growing difficulty in obtaining finance".

Non-performing loans at Kutxa jumped to 1.34 percent at end-Sept from 1.08 percent on June 30, while bad loans grew to 1.16 percent of BBK's book. The two banks noted that both NPL levels sit below the average for Spain's banks, which is rising.

MERGER WAVE

For years the cajas have funded loans -- 70 percent of which are to homebuyers and builders -- by selling mortgage-backed securities abroad. But the funding tap has been turned off by a market that was already growing wary of the cajas' exposure to Spain's now-bust housing bubble even before the credit crunch hit.

Other funding routes are also complicated, as the interbank lending market is virtually paralysed while a share issue is difficult for non-listed businesses.

A spokesman for the Spanish region of Castilla-Leon said on Thursday the financial crisis had accelerated plans led by both major political parties to merge the region's cajas but preserve their separate brands.

The head of Andalucia's regional government has also ,Tsuggested a similar merger in his region.

However mergers are not necessarily a fail-safe option for all Spain's 45 cajas, the Madrid-based banking source noted, since laws preventing cross-regional mergers could simply bring two financially-weakened banks together.

"The government has to be careful who they merge, because two troubled cajas merging together can be a disaster for the future. They will have to reconsider allowing cajas from different regions merging together". (Reporting by Jesus Aguado and Ben Harding; Editing by Hans Peters)