The board of directors of St George Bank has approved a $19 billion takeover offer from Westpac that will create Australia's biggest financial institution, eclipsing Commonwealth Bank of Australia and National Australia Bank.

The combined entity would have a market capitalisation of around $61 billion. It would be Australia's largest home lender with a market share of 25 per cent, and the largest wealth management provider with funds under management of $108 billion.

The banks said the merged entity will have an `AA' credit rating, putting it in a strong position to overcome a difficult debt environment that has driven up funding costs for St George.

The board of St George said it will recommend acceptance of the offer by its shareholders.

The two lenders have also signed an implementation agreement, under which St George shareholders will receive 1.31 Westpac shares for each share they hold.

St George will have an extended period of exclusivity to work with Westpac for the deal. But the agreement does not prevent St George from considering a superior proposal.

Under the agreement, Westpac will retain the St George, BankSA and Asgard brands and keep the ATMs and retail network intact.
There will also be no break fee for implementation of the agreement.

The merger will create ''a springboard for growth with strong brands, leading products and an extensive distribution network,'' said Westpac CEO Gail Kelly.

St George chairman John Curtis said the proposed merger would allow "the distinctive brands, culture and customer service focus of St George to be retained and strengthened.''

While the merger may cost $700 million in integration and deals, pre-tax synergies are expected to make up for 25 per cent of St George's cost base.

St George shareholders will receive a final anticipated dividend for the 2008 financial year.

''This partnership capitalises on a unique opportunity to bring these two organisations together in a way that provides benefits to all stakeholders by building upon the strong foundations of both sets of brands to deliver a truly leading financial services company for customers, shareholders and employees,'' said Westpac chairman Ted Evans.

The deal, which would give Westpac control of almost a third of the mortgages in New South Wales, needs regulatory clearance and is subject to an independent valuation of the stock.

Westpac said it expects regulators to clear the deal by August 30 and for St George shareholders to vote on the transaction on November 6.

Reports last week, meanwhile, said the National Australia Bank was contemplating a bid for St George, but has not decided on it.

However, both NAB and the Australia and New Zealand Banking Group were still trading at a discount to Westpac, making a share bid more difficult.