The merged group, tentatively named Tokai-Asahi, will have assets of 59 trillion yen ($550 billion) and aim to be a "super regional bank" in a tie-up based on a 50-50 partnership.

They will set up a joint holding company by October next year, and their operations will be divided into three regional banks and one international bank by October 2001, they said. The deal will bring 55 billion yen ($514 million) in cost cuts to the new group, slash 4,000 jobs and merge 70 overlapping domestic branches and 10 offshore branches, they added.

Asahi Bank president Tatsuro Ito will be chairman while Tokai Bank president Hideo Ogasawara will be president, they said.

Tokai's operations are primarily concentrated in the Chubu region of central Japan, while Asahi holds a solid retail networkin the Kanto area that includes Tokyo.

The merger reflects wide spread consolidation in Japan's financial industry as domestic banks wrestle with overcapacity, low profitability and lingering bad loans in the wake of the country's worst post-war recession.

The new banking group is aiming for a 450 billion yen ($4.21 billion) operating profit in the year ending March 2003, and a return on equity (ROE) of 14.5 per cent. In the year to March 1999, both banks suffered hefty losses while cleaning up mountains of bad loans. This gave them both a ROE of minus 22 per cent.

They still held a combined 1.68 trillion yen ($15.7 billion) worth of problem loans as of the end of March. "We needed to speed up restructuring and bad loan write-offs in order to move on to this second stage of setting up a holding company, and now the conditions are set for this stage," Tokai Bank president Ogasawara told a news conference.

Analysts welcomed the deal, and said the new structure could pave the way for more participationby other banks in Asahi-Tokai.

"It becomes clear that the two banks are taking a strategy which puts emphasis on the retail business and we can give high marks to the fact they unveiled specific goals and the direction of their restructuring," said Nozomu Kunishige, a senior industry analyst at Lehman Brothers.

Asahi Bank president told the same news conference that there is no specific talks with Daiwa Bank and Bank of Yokohama over whether they are interested in joining the new banking group. The new banking group will be headquartered in Nagoya, the current base for Tokai Bank. Tokai had a staff of 11,094 and Asahi 12,594 at the end of March.