UPDATE 3-In surprise move, CBA sells asset management unit to eager MUFG for $2.9 bln

$2.9 bln@

* Australia banks rushing to offload noncore assets after inquiry

* CBA had originally planned to list the unit with others

* Price tag seen generous at 17.5 times annual net profit (Recasts and adds analyst comment)

SYDNEY, Oct 31 (Reuters) - Commonwealth Bank of Australia will sell its asset management arm to Mitsubishi UFJ Financial Group for $2.9 billion in a surprise sale, the latest business to be sold by an Australian financial giant amid unprecedented regulatory scrutiny.

Australia's biggest lender said it was cancelling plans to list Colonial First State Global Asset Management in favour of a sale to create "a simpler, better bank". For MUFG, Japan's biggest financial group, the deal is aimed at finding new growth away from a stagnant domestic market.

CBA said the price tag was equivalent to 17.5 times Colonial's annual net profit, far higher than the multiples seen for similar asset managers on the Australian sharemarket.

"On the surface it looks fantastic, for CBA shareholders anyway, and cleans up one of their outstanding issues," said Matthew Haupt, portfolio manager at Wilson Asset management, which owns CBA stock.

"The Japanese have done it again, they like paying decent multiples," he added.

Australian finance companies are rushing to offload non-core business units amid widespread expectations that a Royal Commission inquiry will result in a regulatory overhaul of the sector, including new rules forcing banks to split.

The inquiry has exposed a slew of misconduct in the country's financial sector and slammed what it called a culture of greed. CBA has been the most criticised of Australia's Big Four lenders although its global asset management arm did not come under fire.

The deal also coincides with a spike in interest from Asian financial firms which see the world's No. 14 economy as a developed, stable and attractive market.

"While the world economy undergoes a sustained period of instability, the Australian economy has remained remarkably resilient," MUFG said on its website.

"The Australian banking system continues to be robust, while many international banks, particularly from Europe, have retreated to their home markets," it added.

Shares of CBA rose 1.6 percent by midsession while shares in MUFG were up 1.2 percent, both outpacing their broader markets.

Australia's top four banks plus AMP have sold $12 billion in assets over the past two years, not including the MUFG deal. The MUFG deal takes CBA's assets sales to Asian interests in the past year to about A$8 billion.

CBA had planned to bundle Colonial with a host of domestic wealth management businesses in the sharemarket listing. It now plans to pursue the listing without it, prompting analyst concerns about the appeal of the remaining entity.

"It will boost capital levels (but) I'm not sure what it means for their remaining wealth management business," said Morningstar banking analyst David Ellis.

"I'm not sure how much demand there is for that type of business in Australia," he added.

($1 = 1.4102 Australian dollars) (Reporting by Byron Kaye. Additional reporting by Colin Packham in Sydney and Nikhil Kurian Nainan in Bengaluru; Editing by Edwina Gibbs)