By Matt Scuffham and Taiga Uranaka
LONDON/TOKYO (Reuters) - Royal Bank of Scotland has had contact regarding the possible sale of its U.S. retail business Citizens with Sumitomo Mitsui Financial Group <8316.T>, while Mitsubishi UFJ Financial Group <8306.T> has also considered a bid, people with knowledge of the matter said.
RBS, which is 81 percent owned by the British government, said in November it would speed up a planned stock market flotation of Citizens in New York, aiming to start the process in the second half of 2014 and to fully sell the business by the end of 2016.
RBS said on Monday that plan remained unchanged and declined to comment on whether it had held talks with Sumitomo. Chief Executive Ross McEwan had previously indicated that, while the bank was planning for an initial public offering (IPO), it was open to approaches from potential buyers.
RBS shares rose 1.5 percent on Tuesday.
SMFG and MUFG both declined to comment in Tokyo. The talks with SMFG were first reported by the Wall Street Journal.
Both MUFG, Japan's largest banking group, and SMFG, the No. 3 banking group, have signalled an openness to consider a bid for Citizens, but there are significant hurdles in both cases, according to people with direct knowledge of the situation.
Some executives within SMFG support consideration of a U.S. acquisition that would boost the bank's operations in the world's largest economy, while others are cautious because of the likely price of an acquisition, the people said.
The cautious camp has also argued that SMFG would be better off focusing on building up its Asian operations outside Japan, where the prospect for future growth is better and an acquisition could be an easier strategic fit, people with knowledge of the deliberations said.
MUFG is still in the hunt to acquire a bank or branch network to reach its goal of becoming one of the 10 largest U.S. banks by 2016, a senior bank official said in January.
But a bid for Citizens would come at time when MUFG has already been stretched by the challenge of integrating Thailand's Bank of Ayudhya. MUFG bought a 72 percent stake in the Thai bank in December for just over $5 billion.
An acquisition of Citizens by MUFG might also prove a challenge to integrate because MUFG's existing U.S. banking operation is based on the West Coast, people familiar with the matter said. Rhode Island-based Citizens has about 1,400 branches centred on the East Coast and the Midwest.
MUFG has the biggest overseas operations among Japan's banks. In 2008, it bought out UnionBanCal Corp, the holding company for California-based UnionBank, and paid $9 billion for a 20 percent stake in Morgan Stanley .
In 2010, it acquired a $6.4 billion project-financing loan book from Royal Bank of Scotland.
RBS is under pressure to bolster its capital position which has come under strain following a 3 billion pound ($5 billion)charge for past misdeeds which it announced in January.
(Additonal reporting by Taro Fuse; Editing by David Holmes and Louise Heavens)