By Joshua Franklin
ZURICH (Reuters) - EFG International (EFGN.S) has agreed to buy BTG Pactual's Swiss private bank BSI for 1.33 billion Swiss francs ($1.34 billion) in cash and shares, in a deal which could catapult it into the top five of Switzerland's crowded wealth management market.
The sale comes just five months after Brazilian bank BTG Pactual (BBTG11.SA) sealed a deal to buy BSI for 1.25 billion francs, only to decide it needed cash after the arrest of the its billionaire founder André Esteves in November.
EFG expects the combination to make it Switzerland's fifth-biggest private bank behind UBS (UBSG.VX), Credit Suisse (CSGN.VX), Julius Baer (BAER.VX) and Pictet. Its operations would span Europe, the Americas and Asia.
"It gives us the next plateau," Chief Executive Joachim Straehle said at a news conference on Monday.
EFG had been the 12th-biggest player in a market where many analysts expect to see consolidation as smaller banks struggle under increased regulation and an erosion of Switzerland's cherished bank secrecy laws.
"Since EFG was almost condemned to buy for not having critical mass, and because possible acquisitions don't grow on trees, the deal makes sense," Zuercher Kantonalbank analysts wrote in a note.
One of the main sticking points in negotiations was how to handle potential penalties from BSI's ongoing legal issues, which include a money laundering scandal related to the 1Malaysia Development Berhad (1MDB) fund.
The deal, which Reuters reported last week, includes the setting up of a "substantial" escrow account which EFG believes will protect it from any penalties, it said, without giving specific details.
"It will be sufficient to ensure that, if these risks that have been identified will materialise as losses, we will have sufficient time to recover," EFG Chief Financial Officer and Deputy CEO Giorgio Pradelli told reporters.
BSI, which BTG Pactual bought from Italian insurer Generali (GASI.MI), has declined to comment on the scandal but said its normal practice was to fully cooperate with authorities and regulators whenever necessary.
Zurich-based EFG will fund the deal by raising 500 million francs in equity and 250 million in Additional Tier 1 capital instruments.
The prospect of a new share issue weighed on EFG's stock, which was down 5.1 percent at 1315 GMT, lagging a 1.5 percent rise in the European banking index (.SX7P).
EFG will pay 975 million francs in cash, with BTG also getting a roughly 20 percent stake in EFG. This could rise to 30 percent if the share sale gets bogged down in tough markets.
EFG expects to make pretax cost savings of around 185 million by 2019.
The price is around 1.5 percent of BSI's 88 billion francs in managed assets, with the typical price for such deals around 1.5-2 percent, according to analysts.
Fluctuations in the new money that BSI attracts or changes in tangible book value by the time the deal is closed, which is expected by the end of 2016, could affect the price, EFG said.
BTG Pactual said it expected the final price to be between 1.5 billion and 1.6 billion francs when taking into account BSI's profits until the deal is closed.
BTG is set to be EFG's second-biggest shareholder behind EFG Group, which is controlled by Greece's billionaire Latsis family. EFG Group's stake is expected to fall to over 35 percent from more than 50 percent.
($1 = 0.9980 Swiss francs)
(Editing by Greg Mahlich and Mark Potter)