Mexican banking concerns Grupo Financiero Banorte SAB de CV (GBOOY, GFNORTE.MX) and Ixe Grupo Financiero SAB de CV (IXEGF.MX) said Wednesday they have agreed to merge in an all-stock deal valued at an estimated 16.2 billion pesos ($1.3 billion).

In filings with the Mexican Stock Exchange, the banks said the transaction, which requires regulatory and other approvals, is expected to close in the first quarter of 2011.

Banorte said it will issue about 308 million shares to acquire Ixe shares at a ratio of 0.389 to 1. The resulting Grupo Financiero Banorte-Ixe is expected to be the country's third-largest bank with assets of MXN698 billion, a loan portfolio of MXN292 billion, and deposits of MXN312 billion--around a 15% market share in each category.

The banks estimate that, following the integration of their "highly complementary platforms," the group will take advantage of synergies estimated at 5% to 6% of their combined operating costs.

"While we understand the long-term strategic benefits of the Ixe acquisition, we believe that Banorte overpaid," analysts with Deutsche Bank wrote in a note, adding that they maintain their sell recommendation on Banorte shares.

Ixe O shares were at MXN19.60 as of Tuesday's market close, for a valuation of MXN16.6 billion, or 2.3 times trailing book value, on par with Banorte's valuation, Deutsche said. Yet Banorte is generating a return on average equity, or ROAE, of roughly 15% versus 1% for Ixe, the Deutsche analysts noted, and the merger means that Ixe shareholders will control 13% of Banorte.

At around 12:00 p.m. ET, Ixe shares were up 1% to MXN19.79 and Banorte O shares were down 0.7% to MXN53.45.

Banorte is Mexico's third-largest bank, and the largest still controlled by Mexican shareholders. The two largest banks are Spanish-owned BBVA Bancomer and Citigroup Inc. (C) unit Banamex.

Banorte-Ixe will have a combined network of 1,263 branch offices, more than 5,000 ATMs, and nationwide coverage with operations in most market segments, the companies said.

The banks intend to maintain two separate branch networks, differentiated by market segment to give the group a premium bank brand. During its short time in the Mexican market, Ixe has won the allegiance of many high-income clients through above-average customer service that some worry could suffer under Banorte management.

Executives from both banks plan a joint press conference after the market close to further discuss the merger.

-By Amy Guthrie and Anthony Harrup, Dow Jones Newswires; (5255) 5980-5176, mexico@dowjones.com
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