Regional lenders Kagoshima Bank and Higo Bank have agreed to merge next year to tackle the intensifying competition, shrinking population and economic stagnation afflicting the industry.

The banks, both based in Kyushu, plan to establish a joint holding company on Oct. 1 next year, they said in a statement to the Tokyo Stock Exchange on Monday. They will decide on the merger ratio by March.

Officials have been urging local banks to consider combining to shore up profits that are also weighed down by falling interest rates. Bank of Yokohama, the second-largest regional lender by assets, said last week it is considering merging with Tokyo-based Higashi-Nippon Bank.

"We understand that banks need to put extra effort into dealing with the population decline and changes in competition and the environment," the Kyushu banks said. "Building a solid management base to further boost our presence in Kyushu is the common challenge we face so that we can make a lasting contribution to the revitalization of local communities."

The lenders will be delisted next Sept. 28 and relist under the holding company on Oct. 1, according to the statement.

Kagoshima Bank, based in the city of Kagoshima, and Kumamoto-based Higo Bank have ¥8.5 trillion in combined assets, data compiled by Bloomberg show, meaning a merger would put them among the top 10 regional lenders.

Higo Bank hired Mizuho Securities Co. as its financial adviser on the transaction, spokesman Kenshi Nishimoto said. Daiwa Securities Group Inc. is advising Kagoshima Bank, said Shinichi Yamakata, a spokesman for the lender.