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 Inc said it was exploring strategic alternatives for its banking unit to avoid heavy costs associated with stricter supervision under the Dodd-Frank Act.

H&R Block, like other companies with small banking units, is under pressure to get out of the business to escape costly oversight by the U.S. Federal Reserve. Among the biggest exits, MetLife Inc agreed last year to sell its deposit business 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 company to sell the unit rather than launch an IPO, said shedding the banking 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 to offer financial products to customers after 2013.

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

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

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

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

It has cut jobs, shut offices and overhauled its management to 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 its core tax services segment fell 1 percent to $90 million.

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

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

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