Sumitomo Mitsui Financial Group (SMFG) <8316.T>, Japan's third-largest bank by assets, plans to raise up to $8.7 billion by issuing new shares to meet stricter capital requirements and for potential acquisitions in Asia, people with knowledge of the matter said.

SMFG is the latest big Japanese lender to tap a modest stock rebound for much-needed fundraising. Industry leader Mitsubishi UFJ Financial Group <8306.T> raised about 1 trillion yen last month through a share sale.

Without these fundraisers, Japanese banks would fall short of new global capital requirements, analysts have said. The SMFG move is likely to put pressure on second-ranked Mizuho Financial Group <8411.T>, which has yet to announce fundraising plans.

If the news is confirmed, the capital enhancement would be positive from a credit perspective, said Masahiko Watanabe, a credit analyst at Fitch Ratings in Tokyo.

However, Sumitomo Mitsui's underlying profitability is still not so strong, so how they improve their profitability remains the challenge.

The fundraising will be SMFG's second in less than a year, after raising 861 billion yen in July.

SMFG's board will meet as early as Wednesday to formally approve the 800 billion yen ($8.7 billion) fundraising, said five people, who were not authorized to speak publicly about the matter. The bank has begun preparing for the sale and will decide the terms by the middle of this month, they said.

The bank's president Keisuke Kitayama told Reuters Television that while nothing had been decided about fundraising, such a move would be needed.

Capital raising is necessary for our future undertaking of the businesses ... (given) the changing regulatory environment, he said on the sidelines of an annual meeting of Japanese executives on Tuesday.

GLOBAL OFFERING

The new issue will be offered to local and foreign investors and is expected to increase outstanding shares by about 30 percent.

It will also raise SMFG's core Tier-1 capital ratio to about 7 percent, from around 5.9 percent now, the people said. Core Tier-1 capital is a measure of a bank's financial strength.

Most analysts expect that coming regulations will require a core Tier-1 ratio of at least 6 percent.

The Basel Committee, made up of central bankers and supervisors from nearly 30 countries, is expected to publish its draft of banking reforms by the end of the month, rules intended to help prevent another financial crisis.

Following Mitsubishi UFJ's 1 trillion yen fundraising last year -- a record for a Japanese financial firm -- analysts have said SMFG and Mizuho would have to follow suit.

Mizuho and SMFG, they definitely need to raise money, said Kristine Li, credit analyst at RBS in Singapore. Globally, Mizuho and SMFG have among the lowest core Tier-1 ratios.

Goldman Sachs estimated last year that Sumitomo Mitsui would need 834 billion yen and Mizuho would require 1.9 trillion yen to meet requirements.

Mizuho will not be able to issue new shares until January 12, when the lock-up period following its previous share issue ends.

A spokeswoman for Mizuho, Masako Shiono, declined to comment on whether the bank was considering another round of capital raising.

In addition to meeting those capital requirements, SMFG will use the funds for acquisitions in Asia and to strengthen its brokerage arm, Nikko Cordial, the people said.

Kitayama told Reuters last month he was considering inorganic investments in Asia, meaning investments in other financial firms.

SMFG already owns 15 percent of Vietnam's Eximbank and a small stake in South Korea's KB Financial Group <105560.KS>. Last month, it raised its stake in Hong Kong's Bank of East Asia <0023.HK> to 4.05 percent from about 2 percent.

SMFG shares trimmed most of their earlier gains following the news, ending 1.5 percent higher at 2,653 yen, with volume surging to nearly 50 million shares, 5 times the daily average over the past 3 months.

Shares in Mizuho and MUFG also eased on the Reuters report of SMFG's plans, closing up 1.2 percent and 0.2 percent respectively.

(Additional reporting by Noriyuki Hirata, David Dolan, Dan Sloan and Kei Okamura; Editing by Chris Gallagher and Ian Geoghegan)

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