Rewrites throughout with further updates to details and background

March 14 (Reuters) - Australia will provide ANZ ANZ.AX with a decade-long loan guarantee of A$2 billion ($1.26 billion), to ensure the bank maintains the branch network across the Pacific, a move seen as a diplomatic win amid growing regional competition with China.

The federal government considers the likelihood of the guarantee being called is "very low", and the agreement stipulates an annual fee payable by ANZ to Canberra.

Under the terms of the deal, ANZ will also invest an additional A$50 million into its Pacific banking operations to support ongoing services and expand its digital banking capabilities, the bank said in a statement on Friday.

The move comes as Australia and the United States intensify efforts to bolster financial connectivity in the Pacific.

In July 2024, officials from both nations pledged to enhance banking services in the region, as policymakers gathered with regional leaders to address the challenges Pacific Island countries face in maintaining access to global financial systems.

Many small Pacific nations have been grappling with the consequences of Western banks winding down long-term relationships and closing operations, which has severely restricted access to U.S. dollar-denominated accounts. This void has created an opportunity for Chinese financial institutions to expand their presence in the region.

ANZ CEO Shayne Elliott told Reuters in July 2024 that the bank's Pacific operations — while the largest network in the region — were not profitable, prompting discussions with the Australian government about their future.

The company expects the loan guarantee to take effect in the second half of 2025.

In 2024, Bank of China 601988.SS signed a deal with Nauru to explore financial opportunities, underscoring Beijing's strategic push in the region.

ANZ's shares are currently trading 0.1% lower against a flat broader financials sub-index .AXFJ.

($1 = 1.5911 Australian dollars)

(Reporting by Rishav Chatterjee in Bengaluru; Editing by Rashmi Aich and Alan Barona)

((Rishav.Chatterjee@thomsonreuters.com))