SBI, led by Yoshitaka Kitao, formerly of Softbank Group's Masayoshi Son, has publicly said it would aim to become Japan's fourth largest banking group and has already bought stakes in several Japanese regional banks.
As Shinsei Bank has so far not endorsed the move, investors believe its unsolicited bid to increase its stake to a near majority could turn into a hostile bid.
SBI already owns about 20% of Shinsei, a small Tokyo-based lender that took over a collapsed bank during Japan's financial crisis in the late 1990s. The government still holds an about 18% stake in it.
Tokyo Stock Exchange's bank index rose 1.62%, above 1.3% gains in broad Topix. Shinsei Bank jumped 20.8% as SBI offered to 2,000 yen per Shinsei share, a 39% premium over Thursday's closing, for a total of 116.4 billion yen ($1.06 billion).
Shares of regional banks, including those in which SBI already has a stake, gained sharply. Shizuoka-based Suruga Bank rose 5.0% while Sendai-based Jimoto Holdings, of which SBI is the biggest shareholder, gained 4.4%.
"Hopes of more consolidation appear to be driving all this," said Taku Ito, chief portfolio manager at Nissay Asset Management.
SBI Holdings also gained 7.6%, its biggest rise since March 23 last year, while securities brokerage index added 2.9%.
Japanese financial shares, particularly bank shares, have underperformed for many years, burdened by a shrinking population and near-zero or negative interest rates. Most of them trade below their book value.
SBI, the financial unit of SoftBank Group until the tech firm exited in 2006, owns the country's largest online brokerage, an online bank and an asset manager.
But some investors worry SBI may be overpaying.
"I am a bit surprised to see SBI paying that much to acquire Shinsei. I cannot visualise a big synergy," said Yasuo Sakuma, chief investment officer at Libra Investments.
(Reporting by Hideyuki Sano; editing by David Evans)
By Hideyuki Sano