UPDATE 1-DBS selling over 10pct stake in Philippines' BPI-source

(Adds detail on stake, background)

By Saeed Azhar and Rosemarie Francisco

SINGAPORE/MANILA, Oct 11 (Reuters) - DBS Group , Southeast Asia's largest lender, is selling more than half of its $1.3 billion stake in Bank of Philippine Islands (BPI)

to Ayala Corp , a source familiar with the deal told Reuters on Thursday.

Banks around the world have been shedding minority stakes in financial institutions because they are considered inefficient for capital under Basel III rules.

DBS Group CEO Piyush Gupta wants to have controlling stakes in banks, and as part of the strategy made a $7.2 billion bid for Indonesia's PT Bank Danamon . The approval of that deal is delayed due to regulatory reasons.

Ayala, a conglomerate, is the biggest shareholder in BPI, which is the Philippines' largest bank by market capitalisation. DBS owns about 20.3 percent of BPI.

"DBS is selling (a) more than 10 percent stake in BPI," said the source, who asked not to be named because the deal is not public.

DBS and Ayala were not immediately available for comment.

DBS is selling the stake at a time when the Philippines stock market is among the best performing markets in Southeast Asia.

The Philippines main index has gained nearly 23 percent this year, with BPI surging 42 percent. Last week, the shares hit a record high of 81 pesos.

DBS invested S$1.2 billion ($976 million) for a 19.7 percent stake in BPI in December 1999. It has written down part of that investments over the past few years, sources said.

($1 = 1.2293 Singapore dollars)

(Additional reporting by Anshuman Daga; Editing by Michael Flaherty and Mark Potter)

((saeed.azhar@thomsonreuters.com)(65)(6403 5664))

Keywords: DBS BPI/