National Australia Bank (NAB) has agreed to sell 80% of its life insurance arm to Japan's Nippon Life Insurance Co for about US$1.7 billion, said a person familiar with the matter.
Australia's biggest lender by assets is expected to announce the sale on Wednesday when it reports earnings, said the person, speaking on condition of anonymity.
NAB put its shares on a trading halt, saying it was set to announce a "material transaction", while a Nippon Life spokesman declined to comment.
The deal for Australia's second-biggest insurer by market share comes as NAB, like its industry peers, looks to raise funds to boost its capital ratio under new, stricter rules imposed by regulators.
Banks like Australia and New Zealand Banking Group Ltd and Commonwealth Bank of Australia may follow suit, sector watchers say.
"There is a definite possibility of another bank following suit, possibly ANZ," said a Sydney-based investment banker who advises financial institutions on M&A transactions.
ANZ and CBA didn't immediately respond to requests for comment.
Australia is an attractive market for life insurers, with average incomes higher than in emerging markets and a population of 23 million that is growing steadily.
Cash-rich Japanese companies such as Nippon Life – already in talks on product ties with NAB – are seen as ready buyers, seeking new sources of growth outside a shrinking domestic market.
Firms like Sumitomo Life Insurance Co and Meiji Yasuda Life Insurance Co have made a string of multi-billion dollar acquisitions this year.
Australian regulators tightened rules earlier this year, ordering highly profitable banks to hold stronger capital reserves to make them among the sturdiest in the world.
NAB is expected to post its best profit ever on Wednesday, with cash earnings of A$6.3 billion (US$4.55 billion) for the year ended 30 September.
The rule change has led to aggressive capital raising, with the "Big Four" lenders – NAB, ANZ, CBA and Westpac Banking Corp harvesting more than A$20 billion in share sales since the rule change and analysts predicting a similar amount needs to be set aside over the next two to three years.
Earlier this month, Melbourne-based NAB said it was exploring a long-term insurance product partnership with Nippon Life, Japan's largest private-sector life insurer with US$500 billion in assets.
Analysts estimate NAB's life insurance arm has a return on equity of about 8%, compared with an overall bank ROE of 14.7%, and a sale would help NAB improve returns in its wealth unit.
It acquired the life insurance business as part of its wealth management division MLC, which it bought from Lend Lease in 2000 for about US$4 billion. The life insurance operations account for about 20% of MLC, according to Reuters.