TOKYO - Sumitomo Mitsui Financial Group (8316.T) said it would raise up to $9.7 billion in a share sale to meet stricter global banking regulations and expand overseas.

Japan's third-largest bank is tapping a modest stock rebound for much-needed fundraising after industry leader Mitsubishi UFJ Financial Group (8306.T) raised about 1 trillion yen ($10.82 billion) last month.

The announcement was widely expected after Reuters reported on Tuesday the bank was planning to raise funds.

It said it would use some of the capital to strengthen its business in Asia and the wholesale operations of its brokerage arm, Nikko Cordial Securities.

The fundraising will increase outstanding shares by 35.4 percent.

Goldman Sachs Group (GS.N) is expected to convert about 100 billion yen ($1.09 billion) of Sumitomo Mitsui's preferred shares into common stock within a year, an executive for the Japanese bank told a briefing for reporters.

Preferred shares do not count as the high-quality capital that will be emphasized under new global standards for banks.

We still don't know what the (Basel) rules are going to be, but this obviously puts SMFG closer to being past the post, said Brian Waterhouse, Japan bank analyst at brokerage CLSA.

I don't think that they would need to come back to the market for further capital, particularly if they are successful in getting Goldman Sachs to convert their (preferred shares) into common equity.

The Basel Committee on Banking Supervision, 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.

CORE TIER 1

Intended to help prevent another financial crisis, the new rules will emphasize a bank's core Tier 1 ratio, a measure of financial strength that is likely to be defined by common equity and retained earnings, but not include preferred shares and preferred securities.

Analysts estimate that Japanese lenders have some of the lowest core Tier 1 ratios among major global banks, in part because they previously relied on preferred securities to raise funds.

While the Basel Committee has yet to strictly define core Tier 1 -- it is not clear, for instance, if deferred tax assets will count toward the ratio -- in a worst case scenario SMFG will have more than 5 percent core Tier 1, the executive said.

Many analysts expect that a minimum of 4 percent will be introduced. SMFG aims to shrink its stock portfolio by hundreds of billions of yen said the executive, who declined to be identified by name.

A decrease in stock holdings, which are risk assets, would also raise the bank's capital ratio.

SMFG also said it aimed to buy back from overseas investors about $2.5 billion worth of preferred securities and about $2.4 billion of subordinated debt.

GOLDMAN STAKE

Nikko Cordial, Goldman Sachs and Citigroup will be the lead underwriters for the issuance of the 360 million shares, Sumitomo Mitsui said.

The share price for the offering will be decided between January 20 and 22, and the payment date will be five business days after the price is determined.

Goldman and SMFG have capital ties that date back to the 1980s, although the U.S. firm would likely sell its stake after converting it to common stock, the SMFG executive said.

Sumitomo Mitsui's predecessor bank initially gave Goldman a much-needed $500 million cash injection. The Wall Street firm returned the favor in 2003, buying $1.4 billion of Sumitomo Mitsui's preferred shares at the height of Japan's banking crisis.

Some critics accused Goldman of gouging SMFG at a time when the Japanese bank was desperate for capital, citing an unusually high dividend on the preferred shares.

Prior to the capital raising announcement, shares of SMFG rose 5.5 percent to 2,800 yen, outperforming a 3.7 percent rise in Tokyo's banking index .IBNKS.T.

($1=92.04 Yen)

(Additional reporting by Taro Fuse, Nathan Layne and Taiga Uranaka; Editing by Chris Gallagher, Edwina Gibbs, Jason Neely)

Japan Investment Goldman sachs Citigroup