UPDATE: MUFG Trust Unit To Cancel NikkoCiti Trust Buy-Source

Mitsubishi UFJ Trust & Banking Corp. will likely cancel its planned acquisition of NikkoCiti Trust and Banking Corp. from Citigroup Inc. (C), a person familiar with the matter said Wednesday.

The decision to scrap the purchase comes after Mitsubishi UFJ Financial Group Inc. (8306.TO), Japan's largest bank, was beaten out by Sumitomo Mitsui Financial Group Inc. (8316.TO), the nation's third largest, in an auction to buy Citi's Japanese brokerage operations.

SMFG plans to buy Nikko Cordial Securities and parts of investment bank Nikko Citigroup on Oct. 1.

The person said that without Citigroup's other Japan operations, the planned NikkoCiti Trust purchase lacked synergy.

Mitsubishi UFJ Trust last December agreed to buy Citigroup Japan's trust banking unit for Y25 billion as the U.S. bank put units up for sale as part of its restructuring.

The trust bank had planned to complete the deal by April 1 but the deadline was postponed until the end of this year as it had to look into NikkoCiti Trust's situation after it was discovered that it had some exposure to SFCG Co., a moneylender that filed for bankruptcy in March.

Another person familiar with the matter said that Mitsubishi UFJ Trust has also fallen out of the race for Nikko Asset Management Co., while SMFG, Sumitomo Trust & Banking Co. (8403.TO) and Nomura Holdings Inc. (8604.TO) are in the second round of the bidding for the Citigroup unit.

Bids for Nikko Asset Management are seen at around Y100 billion.

Despite not putting in the winning bid for Nikko Cordial Securities, MUFG's attention appears to be directed elsewhere. The bank plans to strengthen its wholesale brokerage business by merging its brokerage unit with Morgan Stanley's Japan brokerage business next spring. This is part of last year's broader deal in which MUFG invested $9 billion to buy just over a fifth of the Wall Street firm.

MUFG also said Tuesday that it will lift its purchase of Morgan Stanley (MS) common stock to $705 million from $600 million, ensuring the U.S. firm's position as an equity-method affiliate.

The Tokyo lender said in a statement it now plans to buy 29.37 million shares for $24 apiece, adding its stake will still likely be over 20%.

On Monday, MUFG said it will swap $600 million of its preferred shares in Morgan Stanley for common stock, keeping its voting rights stake of the U.S. bank above 20%.

-By Atsuko Fukase, Dow Jones Newswires; 813-6895-7567; [e-mail]