UPDATE 1-Shinsei, Aozora banks agree to merge -Nikkei
* Move to create Japan's sixth-largest bank
* Banks seen making announcement this month-paper
* Plan to set up a holding firm in the middle of 2010-paper
* Shinsei shares gain 8 pct; Aozora rises 12 pct
TOKYO, May 11 (Reuters) - Shinsei Bank (8303.T) and Aozora Bank (8304.T) have agreed to merge around the middle of next year, the Nikkei business daily reported on Monday, a move that would form Japan's sixth-largest bank.
The banks may make an announcement this month, the paper said.
Shares in Shinsei rose 8 percent after the report and Aozora gained 12 percent, both extending earlier gains.
The paper said Shinsei, owned 32.6 percent by buyout firm JC Flowers and Co., and Aozora, owned 53.6 percent by Cerberus Capital Management [CBS.UL], had likely received approval from their major shareholders for the merger.
Jiji news agency had reported last month that the two shareholders were opposed to the merger. [ID:nT145835]
Financial sources had previously said the banks aimed to reach a deal and announce the framework of the merger by May 13 when Shinsei is scheduled to report its earnings results for the last financial year.
The banks plan to set up a holding firm in 2010 and merge in a year or so afterward, the paper said. It added JC Flowers and Cerberus will likely remain shareholders in the holding firm.
Shinsei spokesman Eiji Otaka and Aozora spokesman Tsutomu Jimbo declined to comment on the report.
Both lenders were nationalised during Japan's banking crisis in the 1990s and later sold to foreign funds.
A new, merged bank would be on a stronger footing but will liekly need even more government money and may still struggle to compete in domestic lending against mega-banks such as Mitsubishi UFJ Financial Group (8306.T), analysts have said.
Shinsei rose 8.2 percent to 145 yen and Aozora climbed 12 percent to 145 yen. (Reporting by Sachi Izumi; Editing by Edwina Gibbs)
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