Nikko Cordial Corp., the Japanese unit of Citigroup, said it was not looking to sell its merchant banking arm, denying a report that it was in talks with Japan's Norinchukin Bank about a potential $3.4 billion deal.

The Nikkei business daily said earlier on Friday that Citigroup was negotiating to sell the unit, Nikko Principal Investments Japan Ltd., to Norinchukin Bank for more than 400 billion yen ($3.4 billion).

It is absolutely not true that we are considering a sale of Nikko Principal Investments, Nikko Cordial said in a statement.

A highly placed source within Citigroup, who spoke to Reuters on the condition of anonymity, also said there were no talks to sell the unit.

There is no truth to the story, the source said.

A separate source at a Japanese financial firm told Reuters he knew about talks to sell Nikko Principal earlier this year, but said those talks were cut off at an early stage.

The newspaper said Citigroup was looking to unload the unit to concentrate on its strategy of expanding its retail banking and securities business in the world's second-largest economy.

The Nikkei said that Norinchukin would likely acquire about 80 percent stake in Nikko Principal, with the rest to be kept by Nikko Cordial.

A spokesman for Norinchukin, Koji Yuyama, declined to comment. Yuyama said a separate report, which quoted him as saying Norinchukin was in talks about the deal, was incorrect.

A spokeswoman for Citigroup in Japan, Chikako Oki, also declined to comment. She declined to say whether or not a sale of the merchant banking unit would fit into the company's strategy for Japan.

Nikko Cordial said in the statement it considered merchant banking an important part of its business.

UNLISTED BANK

Unlisted Norinchukin, which was founded in 1923 and privatized in 1959, is the central bank for Japan's agriculture, forest and fishery cooperatives.

The bank had assets of 70.8 trillion yen in the year to March 2006, putting it just below Japan's third-largest lender, Sumitomo Mitsui Financial Group Inc. in terms of assets.

Citigroup acquired Nikko Cordial in a $7.9 billion buyout in April. The acquisition came after an accounting scandal involving Nikko Principal nearly led to the brokerage's eviction from the Tokyo Stock Exchange.

Since stepping in to take over Nikko Cordial, Citigroup has outlined plans to list its shares in Tokyo and increase its branch network by about 40 percent to 200.

Three years ago Japanese regulators forced the U.S. financial firm to shut down its private banking business due to rule violations, but now Citigroup is attempting to rebrand itself for the Japanese market.

It recently became the first foreign lender to receive approval to operate as a local entity.

Shares of Nikko Cordial finished up 2.1 percent at 1,562 yen, while Tokyo's securities sector subindex slid 3.9 percent.

(Additional reporting by Taiga Uranaka)

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