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Japan's Sumitomo Trust, Aozora Plan Alliance

Japan's Sumitomo Trust & Banking and Aozora Bank said on Tuesday they plan to form a business alliance, as the two mid-sized lenders vie to remain competitive in an increasingly
cutthroat market.

The two banks said in a statement they plan to work together in real estate, trusts and asset management but denied a newspaper report that they may eventually merge.

Sumitomo Trust is Japan's fifth-largest bank by market capitalization, while Aozora ranks 17th. While Sumitomo Trust is more than twice Aozora's size, both are dwarfed by the country's top three "megabanks", which include Mitsubishi UFJ Financial Group and Mizuho Financial Group.

"Without a doubt this tie-up will likely be a plus for both banks," Credit Suisse analyst Shinichi Ina said in a note to clients on Tuesday. "Both banks are relatively strong in the three areas (of real estate, trusts and asset management)," Ina said. "If their know-how and customer bases expand because of this, this could be a real growth driver."

Japan's banks have been looking for new profit drivers as their core lending businesses remain sluggish.

The Bank of Japan began raising interest rates from zero more than a year ago, but competition to lend and healthier company balance sheets have made it difficult for commercial banks to pass on rate hikes to borrowers.

The deal will allow Aozora to expand its product line-up and give Sumitomo Trust access to a broader customer base, Aozora spokesman Tsutomu Jimbo said.

Aozora will be able to offer Sumitomo Trust's trust and asset management products through its retail branches and its network of affiliated local lenders, Jimbo said.

Aozora has relationships with more than 500 of Japan's local banks, many of which were clients of its predecessor, Nippon Credit Bank.

Earlier this year, Aozora agreed to tie up with Bank of Yokohama, Japan's largest regional lender, on investment banking and training of sales staff.

Aozora's predecessor was nationalized during a banking crisis in the late 1990s and was later sold to private investors including U.S. private equity firm Cerberus. Cerberus floated the bank on the Tokyo Stock Exchange under the Aozora name last year.

Sumitomo Trust is Japan's fifth-largest bank with assets of about 21 trillion yen ($190 billion). Aozora has assets of about 6.5 trillion yen.

Both companies earlier issued statements saying there was no truth to a report in the Nikkei business daily that they would also explore a possible merger.