By By Taro Fuse and David Dolan
Japan's third-largest bank is also considering a business alliance with Barclays in Asia, according to the sources, who spoke on condition of anonymity as the deal has not been finalized.
Barclays, Britain's No.3 bank, has lost more than $5 billion on assets hurt by the U.S. subprime market crisis and credit crunch, and said this week it plans to sell billions of pounds worth of shares to new and existing investors to rebuild its capital.
The UK bank is expected to raise about $8 billion from sovereign wealth funds and other investors, and then offer shareholders the right to buy on the same terms. If Sumitomo Mitsui opts to invest it would give the Japanese bank a stake of just over 2 percent.
Up to five outside investors are expected to participate, and backers may include existing Singapore-based sovereign wealth fund Temasek
Barclays shares were down 1.5 percent at 311 pence by 4:18 a.m. EDT, with the DJ Stoxx banking sector <.SX7P> down 0.3 percent.
Shares in Sumitomo Mitsui were little changed on the news, and some market participants said the investment was too small to become a major earnings driver.
"This is certainly an opportunity for Sumitomo Mitsui, but they don't seem to be taking full advantage of it," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management in Tokyo.
"If they are going to do this properly, they will need to increase the size of their investment," Akino said.
After a decade of faltering under bad debt, Japanese banks have cleaned up their balance sheets and rebuilt their businesses. Now faced with a shrinking market at home, Tokyo's big banks are once again looking for opportunities abroad.
Asian lenders, which avoided the worst of the subprime crisis, are in a strong position to step in with funding for their overstretched Western rivals, analysts have said.
One of Asia's biggest subprime casualties, Japan's Mizuho Financial Group <8411.T>, earlier this year injected $1.2 billion into Merrill Lynch
Stricken U.S. bank Lehman Brothers
Sumitomo Mitsui is considering an investment of about 100 billion yen ($926 million) in Barclays, the sources told Reuters.
A spokeswoman for Sumitomo Mitsui, Chika Togawa, declined to comment. Barclays declined to comment.
SMALL STAKE
Sumitomo Mitsui is likely to take a stake of several percent in Barclays through a private placement of shares, and look to form an alliance in Asia and in the asset management business, the Nikkei business daily said on Friday.
Kristine Li, a banking analyst at KBC Securities in Tokyo, said the deal was evidence that Japan's lenders are still too conservative about expanding overseas.
"It's very typical Japanese style: first you put a little capital in and try to do some kind of tie-up," Li said.
"I just don't think it's Western style and I don't think it will really deliver anything significant."
Ratings agency Standard & Poor's said in a report this month that Japanese banks need to improve their overseas strategies and increase investments abroad in order to gain ground on weakening Western lenders.
With most of the investment in Barclays likely to come from sovereign funds, Sumitomo Mitsui would likely be the only foreign bank to invest into Barclays, the Nikkei said.
Barclays' credit crunch-related losses are far lower than many rivals but it still has one of Europe's leanest levels of capital adequacy. Its ratio of Tier 1 capital, or core capital, was at 5.1 percent at the end of 2007. Raising $8 billion would lift it to near 6 percent, analysts said.
(Additional reporting by Nathan Layne in Tokyo and Steve Slater in London; Editing by Louise Ireland)
