The European Union and Portugal have reached an initial agreement to inject billions of euros into Portugal's largest lender by assets, an important step toward cleaning up the country's troubled banking sector.

Portugal will inject up to €2.7 billion ($3.05 billion) into state-owned Caixa Geral de Depositos SA, according to the state's finance ministry and a spokeswoman for the European Commission, the EU's executive branch. Caixa Geral has committed to selling €1 billion in subordinated debt to private investors. Portugal will also transfer its shares in a subsidiary of Caixa Geral called ParCaixa to the bank and convert about €900 million of contingent convertible bonds, known as Cocos, into equity.

Portugal's capital injection into Caixa Geral won't be considered state aid, the Commission spokeswoman said. Portugal has a debt load of around 130% of economic output and is also trying to whittle down its budget deficit to meet EU targets.

"The Commission's analysis is that the recapitalization takes place on market terms, since the expected return for the state is sufficiently high and are in line with what a private investor would have accepted," the spokeswoman said. The initial agreement needs to be formally approved by all members of the Commission.

The deal provides Caixa Geral with more funds to clean up soured loans. EU and Portuguese authorities hope that will allow the bank to shift its focus to lending more to Portuguese companies. The plan also includes cost-cutting measures and improved corporate governance rules.

Caixa Geral was one of the Portuguese banks that received a capital injection from the state in 2012 under Portugal's €78 billion bailout program with international lenders. However, with the economy still struggling t he government decided another recapitalization was needed.

The lender has 8,370 employees and more than 1,200 branches. It is present in 23 countries, including Angola, Mozambique and Brazil.

Natalia Drozdiak in Brussels contributed to this article

Write to Jeannette Neumann at jeannette.neumann@wsj.com and Patricia Kowsmann at patricia.kowsmann@wsj.com

(END) Dow Jones Newswires

August 24, 2016 11:55 ET (15:55 GMT)