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* New law will allow 100 pct foreign ownership of lenders
* Mitsubishi UFJ, CIMB and TPG among suitors - bankers
* Targets include Rizal Commercial Banking Corp - bankers
* Bank sector showing strong loan growth but is overcrowded
SINGAPORE/MANILA, July 3 (Reuters) - A planned law allowing foreign firms to take full control of Philippine lenders is drawing eager suitors to the sector, including Japan's Mitsubishi UFJ Financial Group and Malaysia's CIMB Group Holdings, bankers familiar with the matter say.
The attraction also lies in the Philippines' emergence as one of Southeast Asia's most rapidly growing economies - one that has sharply boosted personal incomes and demand for loans - while the banking sector is highly fragmented and underdeveloped, making it ripe for consolidation.
Others scoping out acquisition opportunities are private equity firms such as TPG as well as Taiwanese banks, the bankers said, adding that targets include Rizal Commercial Banking Corp (RCBC). The sources declined to be identified as negotiations were confidential.
"The Philippines' banking sector is an attractive market for foreign banks and PE funds because it offers the perfect mix of fast growth in individual wealth and investability," said Keith Pogson, Asia financial services leader at accounting and consultancy firm EY.
By contrast, China, Indonesia and Malaysia place limits on foreign investment in banks.
The Philippine law would replace a cap of 60 percent on foreign ownership and abolish previous rules that allowed just 10 foreign banks in the country. Already passed by Congress, it awaits the approval of President Benigno Aquino, who has flagged this is likely to come soon.
It is one of a slew of economic reforms led by Aquino that follow the Southeast Asian nation's long sought attainment of an investment grade credit rating last year, and brings the Philippines in line with countries like Australia and Japan which allow banks to be wholly owned by foreign firms.
BEVY OF BUYERS
Gaining full control of a local bank, as opposed to just 60 percent, will allow foreign banks to merge a Philippine lender's operations with their own - a strategy that makes it easier for them to capitalise on regional trade flows and serve companies in their home countries that want to invest in the Philippines.
The latter motivation is particularly true of Japanese banks like Mitsubishi UFJ, banking sources said.
"All the heavy industries and construction companies from Japan see a huge amount of infrastructure spending in the Philippines," said a M&A banker at a European bank.
"The Japanese banks want to be there...so they can fund these companies. If you step back further, there is also a strong political desire on the part of the Japanese leadership to have strong ties with ASEAN."
An executive at a large Japanese bank said his bank was looking to acquire a Philippine lender but added it had yet to narrow down any targets. He declined to be identified further. The planned law was also a topic of discussion between Aquino and Japanese Prime Minister Shinzo Abe on Aquino's trip to Japan last month with Abe expressing his approval.
Representatives for Japan's top three banks - Mitsubishi UFJ, Sumitomo Mitsui Financial Group and Mizuho Financial Group - did not respond to requests for comment.
The potential for growth in retail banking may also appeal to some foreign banks. Over the last 10 years, the growth rate for individual wealth has averaged 12 percent - Asia's highest, according to data from EY and Credit Suisse, yet 80 percent of Filipino households still do not have a bank account.
Among other lenders, Malaysia's CIMB said in May it is looking at mid-tier banks after efforts to buy 60 percent of San Miguel Corp's unlisted banking unit fell through.
Singapore's DBS has said it would consider an opportunity in Philippines if it fits its strategy. Last year it walked away from Indonesia's PT Bank Danamon after changes in ownership limits prevented it taking majority control.
TPG and CVC Capital Partners are among buyout firms looking at potential acquisitions, bankers said. They declined to comment.
On one hand, the outlook for loan demand in the Philippines is robust, accounting for the industry's forward 12-month price to earnings ratio of 14, the highest among banks in Asia-Pacific, according to Thomson Reuters Starmine.
Aggregate bank loans are expected to climb between 10 and 15 percent this year, according to Standard & Poor's Ratings Services. Central bank data also shows loans for producing goods and project financing were up 19 percent in May from a year earlier while consumer loans were up 11 percent.
But the industry in its entirety is small. Singapore's DBS has nearly 1.5 times more assets than the combined assets held by the Philippine banking sector.
It is also overcrowded with 700 banks. Indonesia, with more than twice the population, has 120. And many lenders are truly minnows, with the top seven of 36 commercial banks controlling two thirds of the industry's assets.
That has made a compelling case for consolidation, particularly ahead of new capital rules and the planned law has the backing of both the Philippines' central bank and its banking association.
"We've been sending the signal that if you are below a certain scale, sub-scale or your operations are not economical and competitive - so you have options, either you level up or you combine or you sell out," Nestor Espenilla Jr, the central bank's deputy governor, told Reuters.
The government is in the process of selling United Coconut Planters Bank, which has drawn interest from Philippine National Bank and may attract foreign bidders, people familiar with the matter said. Ranked 12th in the Philippines, it has assets of around 265 billion pesos ($6 billion).
But bankers note that the most appealing targets are also the least likely to be interested in accepting a full takeover, although they may be open to selling a stake.
Two of the most attractive targets for foreign suitors may be Philippine National Bank, the country's 5th largest lender, and RCBC, ranked No. 8, said Lexter Azurin, head of equity research at Unicapital Securities Inc. The two banks trade at price-to-book ratios of 1.4 and 1.1 respectively, cheaper than the industry average of 1.7, according to Thomson Reuters data.
PNB Chief Executive Reynaldo Maclang told Reuters his bank was not considering a merger with a foreign lender and RCBC CEO Lorenzo Tan said the bank may consider a non-controlling capital infusion from a strategic investor along the lines of a purchase by CVC in 2011 of a 15 percent stake.
East West Banking Corp, the nation's 14th biggest lender, says it has fielded interest from foreign bidders.
CEO Tony Moncupa said the bank might be open to partnerships or a stake sale, but not a takeover. "If we think it will take the bank higher, then we will consider," he told Reuters. ($1=43.66 pesos)
(Additional reporting by Lawrence White and Stephen Aldred in Hong Kong, Taiga Uranaka in Tokyo and Shilpa Murthy in Bangalore; Editing by Denny Thomas and Edwina Gibbs)