TORONTO (Reuters) - Bank of Nova Scotia (>> Bank of Nova Scotia), Canada's third biggest lender, is in discussions to sell a C$1 billion ($715 million) vendor and equipment financing portfolio, according to four sources familiar with the matter.

Scotiabank, which began the sale process a few weeks ago, is in talks with several parties including Toronto-based Element Financial (>> Element Financial Corp), said three of the sources.

Two of the sources said the assets that Scotia is looking to sell are housed within its Roynat unit, which the bank acquired about 20 years ago.

Roynat provides funding between C$250,000 and C$50 million to small and medium-sized businesses. It mainly offers financing options like term loans, asset based lending and leasing to more than 1,000 companies across Canada.

All four sources, who declined to be named as they are not authorized to publicly discuss the matter, said that discussions are ongoing and there is no guarantee a deal will be reached.

Scotia's sale, coupled with commercial lender CIT Group's (>> CIT Group Inc.) recently outlined plans to sell its similar Canadian business, have given Element some reason to weigh up the planned sale of its own Canadian commercial and vendor (C&V) financing operations, said three of the sources.

Scotiabank declined to comment on the matter. A spokesman for Element said the firm's strategic review around its Canadian C&V business remains ongoing.

The company separately issued a statement late on Wednesday stating that growing its fleet management business remains its top priority.

Last year, Element became the North American leader in the fleet management business when it acquired General Electric Co's (>> General Electric Company) fleet arm in the United States, Mexico, Australia and New Zealand for $6.9 billion.

"Any opportunities to improve the marketability and value of our Canadian Commercial & Vendor Finance business through non-material bolt-on acquisitions would only be considered if those transactions immediately enhance the fundamental economics of that business," Element's Chief Executive Steve Hudson said in the statement.

Element, Scotia and CIT all compete against one another in the C&V market in Canada, servicing and financing mainly small and medium-sized businesses.

Element said in October it would reinvest proceeds from the sale of its C&V unit, which has a C$1 billion asset portfolio, into acquisitions in its core fleet management arm.

Three of the sources said that Element sees an opportunity to expand its own C&V base with the Scotia assets, boosting its own unit's profitability by gaining economies of scale. Such a move would give Element the option to, at a later point, sell a larger and more profitable C&V portfolio.

The three said that while a final decision has not yet been made, Element may not push ahead with a sale of its C&V assets in the near-term, adding that a final decision is likely to be made later this month.

Two of the sources said Element is also interested in CIT's Canadian assets that include about $800 million of loans and equipment finance assets, which the New York-based company put on the auction block in October.

CIT declined to comment on the talks around the sale of its Canadian assets.

In a research note to clients following the Reuters report, RBC analyst Geoffrey Kwan said acquiring Scotia's and CIT's portfolios could materially help improve profitability in Element's C&V business.

"In our view, consolidating the Canadian commercial & vendor finance industry could make sense for Element Financial, but it would still leave them operating in four different business verticals, which contrasts to prior suggestions of evolving into a more focused fleet and rail leasing company," Kwan said.

($1 = 1.3996 Canadian dollars)

(Reporting by Euan Rocha and John Tilak; Editing by Marguerita Choy and Stephen Coates)

By Euan Rocha and John Tilak