June 2 (Reuters) - Polish bank Pekao has signed

a memorandum with insurer PZU to prepare a potential

merger deal to create one of the biggest financial institutions

in Europe.

Ahead of the potential deal, PZU would be split into a

holding company and a wholly-owned unit running its operational

insurance activity, Pekao said on Monday.

Thereafter, the holding company would be merged with Pekao,

the lender added.

Currently, PZU holds a 20% stake in Pekao, Poland's second

biggest lender.

The news comes amid expectations of consolidation in the

Polish banking sector. In recent moves, Austria's Erste Group

Bank bought the Polish arm of Spain's Santander for

6.8 billion euros ($7.8 billion), while Citigroup's ( C/PN ) Polish

unit agreed to sell its consumer banking business in the country

to Velobank.

The announcement also came after nationalist opposition

candidate Karol Nawrocki narrowly won Poland's presidential

election on Sunday, a major blow to the centrist government's

efforts to cement Warsaw's pro-European orientation.

Pekao and PZU aim to complete the possible deal by the end

of June 2026, which they said could free up about 15 billion to

20 billion zlotys ($4 billion to $5.3 billion) of the group's

capital surpluses.

The surplus would increase dividend potential of the

combined companies, Pekao added.

The potential deal depends on a number of factors, including

the entry into force of relevant legislative changes, as well as

regulatory and shareholder approvals.

Both brands will maintain their "identity, distinctiveness

and autonomy of activity" in their respective business areas,

Pekao said, but added the group would be led by a bank, not an

insurer.

The companies also plan to develop an optimal strategy for

Alior Bank, in which Pekao has a 32% stake, the lender

added.

($1 = 3.7460 zlotys)

($1 = 0.8751 euros)