Two of Singapore's five banks are close to a merger, with Oversea-Chinese Banking Corporation (OCBC) confirming that it will take over its smaller rival Keppel TatLee Bank.

OCBC said 70% of Keppel's shareholders had accepted its all-cash offer.

Singapore's Monetary Authority and the island state's stock exchange have already approved the deal.

The government had recently warned that there was room for only two big domestic banks in the Singapore, if they were to compete with foreign banks in the globalised economy.

Next year new liberalised banking rules come into force, making it easier for foreign banks to compete.

Next merger target

Overseas Union Bank is set to be the next takeover target, with both United Overseas Bank and DBS Bank struggling to gain control.

DBS is South East Asia's biggest banking group.

But while the government hopes for two national champions to emerge, one of the sector's foreign competitors believes that ultimately there will be three Singaporean banking groups.

ING Barings said it expected DBS to go it alone, slugging it out with a combination of OCBC and Keppel on one side and Overseas Union Bank joined with United Overseas Bank on the other.

The merger frenzy, however, will hurt Singapore's banks, predict the ING analysts.

Profits are already weak, and the costs of the mergers will hit them further, they say.

Next year's liberalisation of the banking sector will make the situation even more difficult, according to the ING Baring report.

OCBC bank is active in 13 countries, with a focus on Singapore, Malaysia and Greater China.