Nov. 3 (Bloomberg) -- Banco Itau Holding Financeira SA agreed to acquire Uniao de Bancos Brasileiros SA in a stock transaction, creating Brazil's biggest bank as fallout from global market turmoil spread to Latin America's largest economy.

The combination will create a bank with 575 billion reais ($261.4 billion) in assets, the companies said in an e-mailed statement today. The accord follows 15 months of talks between Itau, the second-largest non-government bank, and Unibanco, the third-largest. The banks called the deal a merger.

The transaction may signal more consolidation ahead among Brazilian financial firms amid the global financial crisis. Brazil's central bank has injected more than 100 billion reais ($46.1 billion) in the banking system since Sept. 24 to spur lending and prevent smaller institutions from failing.

``A crisis situation usually triggers takeovers as it exposes the fragilities of the players,'' Carlos Eduardo de Freitas, former director of the central bank, said in a telephone interview from Brasilia. ``We can see other acquisitions in the banking system, but not as significant.''

Itau Chief Executive Roberto Egydio Setubal, 54, will be CEO of the combined bank while Unibanco Chief Executive Pedro Moreira Salles, 49, will be chairman. Itau's controlling shareholders and the Moreira Salles family will name 6 of the 14 board members of Itau Unibanco, according to the statement. Eight directors will be independent.

Itau's parent company, Itausa Investimentos SA - Itausa, and Unibanco controlling shareholders will each have half of the voting shares of a company that will own the combined bank, the statement said. Itau will have all preferred stock in the holding company of Itau Unibanco. Both banks are based in Sao Paulo.

Share Exchange

Unibanco holders will get one share of the combined company for each 1.7391 unit stock held, according to the statement. Unibanco units, the most-traded class of stock, represent one preferred share of Unibanco and one preferred share of Unibanco Holding. The statement didn't outline terms for Itau investors.

Shareholders of both banks will vote in the last week of November or first week of December, the banks said.

Unibanco shares are down 44 percent this year, while Itau shares declined 36 percent through last week. Banco Bradesco SA, Brazil's largest non-government bank by assets, is down 31 percent this year.

Itau shares soared 14 percent to 26.60 reais as of 8:32 a.m. New York time in trading in Sao Paulo, and Unibanco also surged 14 percent to 15.60 reais. Bradesco shares rose 5.2 percent to 26.40 reais.

`Strong Institution'

``This creates a strong institution, I think it's excellent,'' said Carlos Camacho, who helps manage the equivalent of $2.5 billion at Gap Asset Management in Rio de Janeiro. ``The fact that they are paying a premium for Unibanco throws out the worry that Unibanco was in trouble.''

Unibanco urged policy makers last week to lend more foreign currency to the financial system to help finance trade after international banks severed credit lines.

Both Unibanco and Itau released third-quarter earnings ahead of schedule to ease investors' concern on potential losses related to currency derivative contracts after the Brazilian real plunged.

Itau said clients owed the bank 2.4 billion reais from currency derivatives contracts as of Oct. 24, at an exchange rate of 2.3 reais per dollar. The amount is less than 1.5 percent of Itau's loan portfolio, the bank said Oct. 27. Unibanco's clients would have to pay 1 billion reais to cancel leveraged positions that are losing money in the derivatives, less than 0.5 percent of total assets, Unibanco said Oct. 24.

``The global crisis worsened, we started to have severe credit problems in Brazil, and there's the problem with the derivatives contracts,'' said Adilson Goes, currency-trading director in Sao Paulo at brokerage Levycam CCV Ltda, in a phone interview from Sao Paulo. ``Both banks have clients who bought those so-called `toxic' contracts and are somehow involved in the losses.''

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net; Telma Marotto in Sao Paulo at tmarotto1@bloomberg.net

Last Updated: November 3, 2008 09:30 EST