Financially troubled Chuo Mitsui Trust & Banking Co. has entered the final phase of talks to come under the management of Sumitomo Mitsui Banking Corp., sources said Friday.

Sumitomo Mitsui is considering a proposal to recapitalize Chuo Mitsui by buying tens of billions of yen worth of new shares, the sources said.

Chuo Mitsui's financial health has been seriously crippled by huge loan-loss charges and latent losses on securities holdings that were registered when new mark-to-market accounting rule were introduced in Japan.

The sources said Chuo Mitsui will be forced to forgo midterm dividend payments because it will book net losses of 10 billion yen to 20 billion yen for the April-September first half of fiscal 2001.

Meanwhile, the two banks issued separate statements to the press denying that the integration talks are taking place. But Chuo Mitsui said, "Our company is a part of the Sumitomo Mitsui group and we are considering various matters, including a tieup within the group."

Speculation concerning Chuo Mitsui's fate has grown in recent years in view of its asset quality and operating profitability at a time when other major banks have moved to form major banking groups.

Sumitomo Mitsui, created through the April 1 merger of Sumitomo Bank and Sakura Bank, has assets of 113 trillion yen, second in size behind Mizuho Holding Inc., which owns Fuji Bank, Dai-Ichi Kangyo Bank and the Industrial Bank of Japan.

Chuo Mitsui and Sumitomo Mitsui are expected to see their retained earnings -- a core component of their shareholders' equity -- reduced sharply under the mark-to-market accounting rule. Japanese laws allow a bank to pay out dividends only from this component.

The rule requires a bank to subtract 60 percent of latent losses on securities holdings from its retained earnings if it incurs a net loss, when latent losses eclipse net gains from various income sources.

With the two banks set to book large latent losses on their stockholdings due to the weak stock market, they face the prospect of their retained earnings being wiped out by latent losses in fiscal 2001, they said.

Among Japan's four giant banking groups, only Sumitomo Mitsui was formed through an outright merger of banks.

The other three groups came into being via the establishment of a holding company under which component banks were placed.

The revised Commercial Code allows a financial holding company to use a portion of legal reserves -- another key component of a bank's shareholders' equity -- to pay stock dividends, starting with the fiscal 2001 book-closings.

If the plan to integrate Chuo Mitsui and Sumitomo Mitsui into a bank holding company is realized, the holding company would be able to dig into their legal reserves to pay stock dividends on both their common and preferred shares.

Both Sumitomo and Sakura received government injections of public funds in the past to replenish their capital accounts.

Sumitomo Mitsui has a workforce of 27,800 with 1,226 domestic branches, whereas Chuo Mitsui has 7,362 staff with 137 branches. Chuo Mitsui was formed in April 2000 through the merger of Mitsui Trust & Banking Co. and Chuo Trust & Banking Co.