Bahrain's Ahli United Bank and Kuwait Finance House have been in merger talks since mid-2018 and the banks said in an update that their boards have now agreed that the Kuwait lender will offer one share for every 2.326 AUB shares.
The statements by the two banks did not provide the share price for the exchange ratio, but based on KFH's current share price of 0.623 dinars it values AUB at $7 billion(5 billion pounds), above its current market capitalisation of $6 billion, according to Refintiv data and Reuters calculations. That represents a 17 percent premium on the AUB share price.
Shares of AUB closed up 2.7 percent and KFH were down 0.8 percent.
Bank mergers picked up pace in the region after two of the United Arab Emirates' biggest banks linked up to create First Abu Dhabi Bank last year.
The Bahraini and Kuwaiti lenders said the deal is subject to completion of due diligence and required approvals by regulators.
The valuation report was prepared by HSBC and Credit Suisse, they said.
(Reporting by Saeed Azhar; Editing by Elaine Hardcastle)