* Aviva exploring sale option for Australian business
* Sale could fetch up to A$1 billion
* AXA Asia Pacific and AMP seen potential buyers
* Aviva shrs rise 6.1 pct in morning, broad mkt up 0.8 pct (Adds quotes, names of potential buyers, stock price, bylines)
By Denny Thomas and Victoria Howley
SYDNEY/LONDON, May 6 (Reuters) - British insurer Aviva plc (AV.L) is exploring selling its Australian business, which is valued at up to A$1 billion ($735 million), sources with direct knowledge of the process told Reuters.
Aviva declined to comment and so did Morgan Stanley and JP Morgan. Aviva shares were up 6.1 percent in London on Wednesday morning, outpacing a 0.75 percent rise in the FTSE 100 index .FTSE.
A sale could help Aviva to further alleviate concerns about its capital position, which has been a cause of concern for some investors after the group left its 2008 dividend unchanged in March. But Aviva last month bolstered its capital reserves by a quarter, addressing some of those worries. [ID:nLR64522].
On Wednesday, Aviva outlined plans to return surplus funds to customers, giving 90 percent of its one million eligible policyholders a cash payment of between 200 pounds and 1,150 pounds. [ID:nL6931926].
The proposed retreat from Australia is part of a growing trend of foreign financial institutions scaling back from the nation to focus on their home markets. Last year, British lender HBOS plc HBOS.L sold its Australian unit, BankWest, to Commonwealth Bank of Australia Ltd (CBA.AX).
The Australian insurance market had endured turbulent times in the last five to 10 years, Eamonn Flanagan, analyst with UK stockbrokers Shore Capital said, adding that other UK insurers, Prudential Plc (PRU.L) and Legal & General (LGEN.L), pulled out of the market ahead of the turmoil.
"Having weathered the storm, it would be strange for Aviva to sell now," he said.
Aviva Australia consists of life insurance, wealth management and minority stakes in some financial planning business, which together earned about A$90 million in 2008, one source who saw the sale document, said.
"I think, they have a marginal position in this market, both in life and wealth management," said one banker, about Aviva. "The parent has obviously made the decision that it's not core to their business," the source added. The source declined to be identified as the process was not public yet.
"It is fair to say it is a transaction that will make sense to a lot of people," he added. He declined to say if he was advising any likely buyers.
Potential buyers for the asset could include AXA Asia Pacific Holdings Ltd AXA.AX and AMP Ltd (AMP.AX), banking sources said.
Both AXA and AMP declined to comment.
AXA, a unit of French insurer AXA SA (AXAF.PA), is sitting on about A$1.1 billion in total assets above the minimum required by the Australian regulator, the company told shareholders on Wednesday.
"I am sure, AXA will be in the mix. If it makes half sense to anyone, it's got to be them," the second source said. He declined to be identified as the sale process was not public. The source also declined to say if he was advising any potential buyers.
"But they need to convince their French parent to stump up," he added. An AXA spokeswoman declined to comment.
While most Australian banks are likely to have a look at the assets, not many are seen as keen bidders as they are fighting their own bad-debt battles.
"I am not sure if any of the major banks are really focused on stepping up on life insurance right now, given all the issues they have got. Every time they look under a rock, there is another bad debt waiting for them," the second banker said.
"Staying alive is their top priority," he added.
Westpac Banking Corp (WBC.AX) chief executive Gail Kelly said on Wednesday the lender was focused on integrating last year's acquisition of St George Bank, when asked if the group would look at acquisitions. Westpac reported a weaker first-half profit after its bad-debt charges tripled. [ID:nSYD384598]. ($1=A$1.36) (Editing by Muralikumar Anantharaman)