UPDATE 2-H&R Block exploring options for bank as Dodd-Frank squeezes

* Costs rise under stricter supervision by Federal Reserve

* Company's shares fall 5.4 percent

(Adds analyst comments, updates shares)

Oct 10 (Reuters) - U.S. tax preparer H&R Block Incsaid it was exploring strategic alternatives for its bankingunit to avoid heavy costs associated with stricter supervisionunder the Dodd-Frank Act.

H&R Block, like other companies with small banking units, isunder pressure to get out of the business to escape costlyoversight by the U.S. Federal Reserve. Among the biggest exits,MetLife Inc agreed last year to sell its depositbusiness to General Electric Capital .

H&R Block's small specialized banking unit, HRB Bank,provides banking services mainly to the company's tax clients.As of July 31, it had cash balances of $341 million.

Morningstar analyst Vishnu Lekraj, who expects the companyto sell the unit rather than launch an IPO, said shedding thebanking business would be "pretty positive" for the company,given the increased capital requirements demanded by regulators.

But he expressed concern about the company's ability tooffer financial products to customers after 2013.

"I expect that there will be an agreement between (H&RBlock) and whoever buys the banking operations. That entity willprovide them the funding for any financial products they mayneed for a certain period at least," Lekraj said.

The company, whose shares were down 5.4 percent in morningtrading on Wednesday, said it did not expect any material impacton its earnings for fiscal 2013.

It has engaged Goldman Sachs to advise on strategicalternatives for the bank.

H&R Block is facing stiff competition in its tax preparationbusiness from do-it-yourself tax filing services such as IntuitInc's TurboTax software, and the company has been on acost cutting drive for most of this year.

It has cut jobs, shut offices and overhauled its managementto focus on its fast-growing digital tax preparation business.

Kansas City, Missouri-based H&R Block reported a net loss of$107 million for the first quarter ended July 31. Revenue in itscore tax services segment fell 1 percent to $90 million.

H&R Block shares were trading at $16.67 in late morningbusiness on the New York Stock Exchange.

(Reporting by Sharanya Hrishikesh and Ashutosh Pandey inBangalore; Editing by Ted Kerr)

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