Oct. 27 (Bloomberg) -- Sumitomo Trust & Banking Co. and Chuo Mitsui Trust Holdings Inc. are in talks to merge, two people familiar with the matter said.

The people declined to be identified because the discussions are private. The banks plan to merge in early 2011, the Nikkei newspaper reported earlier, without citing anybody. The two companies, which had a combined market value of 1.39 trillion yen ($15 billion) as of yesterday, said in statements to the Tokyo Stock Exchange today that “nothing has been decided.”

A deal between the two companies would mark Japan’s biggest banking merger in four years and create the country’s fifth- largest publicly traded lender by assets, according to data compiled by Bloomberg. Shares in both lenders advanced in Tokyo today before being suspended from trading.

“To survive the global competition, a merger makes sense,” said Mitsushige Akino, who oversees the equivalent of $450 million in assets in Tokyo at Ichiyoshi Investment Management Co. “If they are going forward with this merger, it’s positive news for the overall banking industry.” The merged bank would have assets of 36.3 trillion yen, based on figures as of June 30.

Chuo Mitsui’s shares surged as much as 12 percent on the Nikkei report, the most in almost nine months. The stock was up 7.9 percent at 367 yen when it was placed in a temporary trading halt. Sumitomo Trust rose as much as 4.3 percent and was up 1.8 percent at 500 yen when it was suspended.

Both banks specialize in managing pension assets and financing real estate transactions.

‘Expansion Path’

Sumitomo Trust will be the surviving entity, with the new company including both the Sumitomo and Mitsui names, the Nikkei report said. Chuo Mitsui aims to repay about 200 billion yen in public funds before the merger, the Nikkei said.

Sumitomo Trust had total assets of 21 trillion yen as of June 30, compared with 15.3 trillion yen for Chuo Mitsui. Together, they would rank behind Resona Holdings Inc., which had 39.8 trillion yen in assets.

The global financial crisis and the ensuing economic slump has led to a reshuffling of Japan’s financial-services industry, with Citigroup Inc. selling assets in the country and Shinsei Bank Ltd. and Aozora Bank Ltd. agreeing to merge in July.

Sumitomo Trust said Oct. 1 it completed the purchase of 99 percent of Citigroup’s Nikko Asset Management Co. unit for 112.4 billion yen.

“Sumitomo Trust has been on an expansion path since their purchase of Nikko Asset and it’s a positive move,” Akino said.

Preferred Partner

Hitoshi Tsunekage, president of Sumitomo Trust, and Chuo Mitsui’s Kazuo Tanabe appear to have reached a basic agreement on the merger and the banks will submit a report on their plans Japan’s Financial Services Agency by the end of the week, the Nikkei reported.

The merger would be the biggest among Japan’s banking groups since Mitsubishi Tokyo Financial Group Inc. acquired UFJ Holdings Inc. in October 2005 to form Mitsubishi UFJ Financial Group Inc.

Tanabe said in June that if his bank was to merge with another lender, he would prefer Sumitomo Trust to any of Japan’s three largest publicly traded banks -- Mitsubishi UFJ, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc.

Sumitomo Trust reported a first-quarter profit of 12.2 billion yen and has forecast full-year net income of 45 billion yen. Chuo Mitsui has said it expects a 30 billion-yen profit for the fiscal year that ends March 31.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.netTakako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

Last Updated: October 27, 2009 04:50 EDT