Nov. 6 (Bloomberg) -- Sumitomo Trust & Banking Co. and Chuo Mitsui Trust Holdings Inc. agreed to merge creating Japan’s fifth largest bank as they seek to boost profit and brace for tougher capital requirements.

The lenders will set up a holding company in April 2011, under which Osaka-based Sumitomo Trust and Tokyo-based Chuo Mitsui will place their operations, the banks said in a statement today. They haven’t determined a merger ratio.

The transaction, creating a bank with assets of 36 trillion yen, will be nation’s largest banking merger since the creation of Mitsubishi UFJ Financial Group Inc. in 2005. Six regional banks have agreed to merge in Japan since 2008 in an economy forecast to shrink 5.7 percent this year.

“It’s hard to see a growth story here,” said Yuichi Chiguchi, who helps manage about $8.6 billion at Diam Co. in Tokyo. “If the banks undertake aggressive restructuring or cost cutting to clean up their balance sheets, they may be able to secure a higher capital ratio, but that seems unlikely.”

Sumitomo Trust had a Tier 1 capital ratio of 8.47 percent at the end of June, based on international banking standards. Chuo Mitsui’s stood at 9.31 percent, based on domestic standards used by the company. Citigroup Inc. had a Tier 1 capital ratio of 12.7 percent at the end of September.

Financial Services Minister Shizuka Kamei said in October that Japanese banks need to strengthen their capital, while a month earlier global leaders at the G-20 Pittsburgh Summit said they’ll require lenders to hold more capital by the end of 2012.

S&P Sees Benefit

Net income at Sumitomo Trust fell 33 percent to 19 billion yen in the first-half ended Sept. 30, according to a preliminary earnings statement on Oct. 30. The bank’s stock fell 0.8 percent today to 476 yen, extending its decline this year to 7.8 percent.

Chuo Mitsui, which is scheduled to announce earnings on Nov. 13., fell slipped 2.2 percent in today to 313 yen. It’s slumped 27 percent this year.

The combined company will be called Sumitomo Mitsui Trust Holdings Inc. and be listed on the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock, according to today’s statement.

The company’s chairman will come from Sumitomo Trust and the president from Chuo Mitsui.

Standard & Poor’s put Chuo Mitsui’s credit ratings on watch for a possible upgrade, saying the company’s financial strength is likely to rise by combining with Sumitomo Trust.

Credit Costs

“The profitability of the merged company is likely to improve over the medium term if the appropriate business strategy is implemented,” the ratings company said in statement today. “In the lending business, each bank’s strengths may be further enhanced because the customer bases and business development areas of both banks rarely overlap.”

Sumitomo Trust, which was formed in 1925, remained independent even as thirteen rivals merged from the 1990’s onwards as bad debts plagued Japan’s largest banking groups.

The bank has booked more than $1 billion in credit costs and losses related to overseas asset-backed securities.

Chuo Mitsui remains 30 percent state-owned and owes the government 200.3 billion yen from bailouts.

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. Shinsei Bank Ltd., partly owned by private equity investor Christopher Flowers, and Aozora Bank Ltd., controlled by Cerberus Capital Management LP agreed in July to merge by October 2010 after recording total losses of 386 billion yen in losses.

Sumitomo Trust had total assets of 21 trillion yen as of June 30, compared with 15 trillion yen for Chuo Mitsui. Together, they would rank behind Resona Holdings Inc., which had 39.8 trillion yen in assets.

The nation’s economy is expected to shrink by 5.7 percent this year, and grow by 1.3 percent next year, according to median estimate of 13 economists surveyed by Bloomberg.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Takahiko Hyuga in Tokyo at thyuga@bloomberg.net;

Last Updated: November 6, 2009 03:14 EST