Lloyds TBS proposes merging with HBOS, Britain's biggest mortgage lender, in a cash bid worth more than £12 billion ($27.6 billion).
"Developments overnight regarding a possible merger between HBOS and Lloyds TSB is a matter that is being managed from the UK,'' HBOS Australia head of corporate affairs Adam Connolly told AAP.
"HBOS Australia continues business as usual.''
The merger of HBOS and Lloyds TSB will create a $US54 billion ($68.47 billion) financial giant that will hold 30 per cent of all UK mortgages.
The combined entity will also have 40 per cent of all UK bank deposits, 140,00 staff around the world, 300 branches and 38 million customers.
Lloyds TSB's expected offer of 232 pence per share has not yet been formally announced.
But reports from the UK overnight cited HBOS as saying its was in "advanced talks'' with Lloyds TSB about the offer.
Broadcasters BBC and Sky News reported that a deal had been struck, with an announcement expected to be made early Thursday UK time.
The deal is expected to sweep aside ongoing rumours that HBOS could sell its Australian unlisted retail banking arm BankWest.
If Lloyds TSB is successful in buying HBOS, the BankWest business will allow it to diversify its earnings out of the UK, where the economy is in a slump.
The prospect for a forced sale of BankWest would likely fall away, as Lloyds TSB looked to benefit from a relatively stable Australia economy, where growth is still ticking along, albeit it lower rates than in the past.
Reserve Bank of Australia governor Glenn Stevens said in a speech yesterday that while Australia had been affected by the fallout from recent volatility in financial markets, it had not suffered like the US or UK economies.
"Australia has been affected by these forces, but much less than the countries at the epicentre,'' he said.
"Our financial system is weathering the storm well.''
HBOS Australia has put BankWest on an expansion program to roll out new branches in the eastern states.
BankWest, which was founded in Western Australia, has said it is running ahead of its targets for expansion and underlying performance, with a strong capital base and robust liquidity.
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