Japanese regional lenders Bank of Ikeda and Senshu Bank, a unit of top-ranked Mitsubishi UFJ Financial Group, said on Thursday they may merge, the latest sign of consolidation among the country's small banks.
The Nikkei business daily said the banks are likely to agree on the deal by the end of this month and combine this year. The two banks said in separate statements they may start discussions about a merger but nothing had been decided.
Shares of both lenders rose sharply, with Bank of Ikeda jumping 10.6 percent to 3,300 yen by mid-afternoon while Senshu climbed 13 percent to 260 yen. The Tokyo Stock Exchange's index of bank shares rose 2.8 percent.
The combination of the two Osaka-based banks would create the second-largest bank in the greater Osaka area, behind Bank of Kyoto, the Nikkei said.
It could also raise expectations for increased consolidation among Japan's scores of regional banks, which have been hit by a dwindling customer base and new competition from Japan Post.
So far, Kansai, or Japan's western region, has not seen local bank consolidation, said Graeme Knowd, a banking analyst at CLSA Asia-Pacific Markets.
"It's interesting that it's the start of consolidation in Kansai, which hasn't happened (before)," Knowd said. "Kansai, and Osaka in particular, is over-banked."
Unlisted Taisho Bank, another MUFG unit, would likely join the merged bank, the Nikkei said. MUFG's stake in the new bank would be more than 30 percent at first, although that would be later lowered to less than 15 percent to allow for independent management, the paper said.
The merged bank would likely have a stronger presence throughout the Osaka region. Ikeda is based mainly in the northern part of Osaka prefecture, while Senshu is strong in the south, the Nikkei said.
Small lenders have traditionally dominated rural Japan -- areas where the large city banks, such as Mitsubishi UFJ and Mizuho Financial Group, have little presence.
But that dominance has been threatened by a declining rural population and new competition from the post office, which has increased its banking services as part of its privatisation process.
Fukuoka Financial Group, the top bank on Japan's southwestern island of Kyushu, last year bought up two rivals, increasing expectations the overcrowded sector would soon see rapid consolidation.
Bank of Ikeda's deposits totalled 2.1 trillion yen ($19.43 billion), while Senshu's came to 1.8 trillion yen, according to the latest information available from the banks.
Bank of Ikeda has about 75 branches and 1,250 employees while Senshu has 64 branches and 1,220 employees.