2nd UPDATE: La Caixa Plans To Spinoff Bank Operations To Criteria

Spanish savings bank La Caixa said Thursday that it plans to transfer its banking business to listed unit Criteria CaixaCorp SA (CRI.MC), in a bold restructuring effort to improve management and its access to capital markets.

Such a move by Barcelona-based La Caixa, the biggest and healthiest of the large savings banks, could set an example for other "cajas" to follow, analysts say. In the wake of the international financial crisis, Spain's government and central bank are pressuring the mutually owned cajas to spin off their banking operations into incorporated companies that can list on the stock market to improve accountability and funding options.

Criteria said in a filing with regulators Thursday that directors from both companies will analyze and approve the asset "reorganization" later Monday.

The potential asset restructuring between La Caixa and Criteria could create the country's third-largest listed financial institution by assets, with close to EUR275 billion, only behind local giants Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA).

La Caixa, which controls 10% of the country's loans and deposits, recently modified its bylaws, opening the door for an overhaul of its banking operations. Such a restructuring would also require the reshuffling of some assets held by Criteria, which owns stakes in financial services companies abroad.

According to one person familiar with the situation, La Caixa plans to operate with three divisions: a listed banking unit, an unlisted industrial holding for its portfolio of industrial assets and a foundation for its social initiatives. The three divisions will form part of La Caixa, which will continue with its formal savings bank status, this person added.

Unprecedented economic turmoil and a rising pile of bad loans linked to the implosion of the country's once mighty real estate sector is forcing the cajas to seek fresh alternatives to raise capital, and also pursue market discipline to improve transparency and foster efficiency.

On Monday, the government raised capital requirements for all financial institutions and said it would require some cajas to have even higher levels. The move aims to accelerate the transformation of cajas into listed banks.

The government also overhauled regulations to allow the partial nationalization of ailing cajas and enable the injection of fresh capital into them.

The clean-up of banks is a key part of Spain's effort to shore up investor confidence in the euro zone's fourth-largest economy. Spain's borrowing costs sky-rocketed after Ireland's finances buckled under the weight of massive loan losses among its banks. Ireland is also suffering from a massive housing bust.

With close ties to local communities and often controlled by local governments, Spain's cajas have borne the brunt of the collapse of Spain's decade-long housing boom. Their fast-rising bad debt levels, combined with a lack of transparency, have stoked investor concerns and created severe financing difficulties for both the cajas and the country's listed banks.

Last year, the Barcelona-based giant approached listed Catalan rival Banco Sabadell SA (SAB.MC) to discuss a potential merger that would have given La Caixa a market listing and become a full bank, according to people familiar with the situation.

The talks between the two companies didn't lead to formal negotiations, as the overlap and geographical concentration of the two banks in their home Catalan markets across northeastern Spain would have resulted in massive layoffs and risk concentration at a time of challenging market conditions, these people added.

-By Santiago Perez, Dow Jones Newswires; (34) 91 395 8120; djmadrid@dowjones.com

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