SYDNEY (Reuters) - Australia and New Zealand Banking Group Ltd (>> Australia and New Zealand Banking Group) has sold its pension unit to IOOF Holdings (>> IOOF Holdings Limited) for A$975 million ($766 million), joining the rush of Australian banks quitting non-core and scandal-hit divisions to boost capital.

The deal fell short of a total exit of ANZ's insurance and wealth management operations which the bank had flagged a year earlier, and which had been expected to fetch about A$4 billion.

But Atlas Funds Management chief investment officer David Hugh, who owns ANZ shares, said it meant the bank could now focus again on its core lending business after decades of expansion into "capital-light wealth management".

"There were concerns they were damaging their core lending businesses with all these scandals and things gone wrong in those areas. So we think this is overall a good deal for ANZ," he said.

The sale is part of a trend of asset sales across Australia's banking sector as major lenders dismantle their insurance and wealth businesses in the face of growing competition from global players like AIA Group, and in response to regulatory pressure to raise capital.

Commonwealth Bank of Australia sold its life insurance unit last month to Hong Kong's AIA (>> AIA Group Ltd) for $3.1 billion, and said it may spin off its wealth management unit in an initial public offering.

Australia's major banks have been hit by scandals in their wealth and insurance units in recent years. ANZ has had to pay millions of dollars to remediate 27 law breaches in the OnePath unit, affecting about 1.5 million customers.

Shaw and Partners banking analyst David Spotswood said ANZ's decision to carve out the wealth management business and sell the insurance business separately was something of a surprise.

"Clearly they are having trouble selling the whole wealth and life business," he said.

"I think the market will be mildly disappointed with their progress of selling their wealth business and the cost."

While the sale would boost ANZ's cash holdings, the lender also said it would cost A$300 million after tax in separation and transaction costs.

ANZ Wealth Group Executive Alexis George said selling the insurance business separately gave "greater flexibility".

ANZ shares were up 0.65 percent at A$30.29 in early afternoon trade, behind gains at the other three major banks but in line with the broader market.

IOOF shares were on a trading halt.

The deal makes IOOF Australia's second-largest pension management business, behind AMP Ltd (>> AMP Limited), IOOF Managing Director Christopher Kelaher told Reuters.

"The most exciting part is the partnership that is represented by the transaction ... We will work together and service their customer base," Kelaher said, referring to a 20-year distribution alliance agreement with ANZ.

IOOF said it would fund the deal with a A$450 million institutional share placement.

Analysts at Credit Suisse said the deal was highly accretive for IOOF, the largest independent financial network in Australia.

($1 = 1.2734 Australian dollars)

(Additional reporting by Sonali Paul and Chris Thomas; Editing by James Dalgleish)

By Paulina Duran and Byron Kaye