UPDATE 4-Sumitomo Trust, Chuo Mitsui in merger talks

* Would be Japan's top trust bank with Y36.4 trln in assets

* Banks to hold briefing at 0700 GMT

* Merger ratio yet to be determined - Nikkei (news)

* Analyst: Trust bank market is "oversupplied"

* Sumitomo Trust shares end down 0.8 pct, Chuo falls 2.2 pct (Updates analyst comment, adds background)

TOKYO, Nov 6 (Reuters) - Sumitomo Trust and Banking Co Ltd and Chuo Mitsui Trust Holdings Inc said they are in talks to merge, which would create Japan's largest trust bank with scale to better compete in a crowded asset management industry.

Sumitomo Trust, Japan's fifth-largest bank, and sixth-ranked Chuo Mitsui said in separate statements they were in negotiations and would make an announcement upon reaching an agreement. A Sumitomo Trust spokesman said the banks would hold a news conference at 0700 GMT.

Together, Sumitomo Trust and Chuo Mitsui would have 36.4 trillion yen ($401 billion) in assets, surpassing the 21.5 trillion yen held by Mitsubishi UFJ Trust, a unit of top Japanese bank Mitsubishi UFJ Financial Group .

Analysts have long warned that Japan -- which is home to a rapidly ageing population and a vast network of lenders -- has too many banks and needs further industry consolidation.

"The market is oversupplied. There are six major trust banks and quite a few smaller ones," said Neil Katkov, senior vice president at Celent, a financial consultancy.

Unlike traditional lenders, trust banks also focus on asset management, real-estate finance and custodian banking, which is the servicing of client assets.

Japan's trust banks don't have the size or expertise to compete globally with custodians such as State Street Corp (NYSE: STT - news) and Bank of New York Mellon , and also face pressure from the major domestic lenders at home, Katkov said.

The merger could strengthen the combined bank's franchise and improve long-term profitability, Fitch Ratings said in a research note last week. The new bank would have the largest market share of pension funds and real-estate trusts among Japanese trust banks, Fitch said.

EYES ON ASSETS

Analysts have also worried about Sumitomo Trust's exposure to struggling consumer finance firm Aiful Corp , which in September asked creditors for permission to delay repayments on $3 billion in debt. [ID:nT104420]

Sumitomo Trust has 90.8 billion yen in outstanding loans to Aiful (Berlin: AAU.BE - news) .

Sumitomo Trust last month bought Citigroup (NYSE: C - news) 's Japanese asset manager Nikko Asset Management for $1.2 billion as it attempts to increase its retail business.

Japan has an estimated $15 trillion in household savings, which both domestic and overseas asset managers are keen to target. In addition to local banks, Europe's HSBC (LSE: HSBA.L - news) and Standard Chartered (LSE: STAN.L - news) have been looking to expand their presence in the market.

As part of the merger, Sumitomo Trust and Chuo Mitsui will close a quarter of their branches, or 29 of their 118 offices, the Nikkei said.

The two will first form a holding company in April 2011 and merge their businesses a year later, the Nikkei newspaper said on Friday, adding that the merger ratio will be decided later.

Chuo Mitsui is about 30 percent owned by the government, which injected money as part of a bailout a decade ago.

Although the merged bank would be the biggest among Japanese trust banks, it would be No.5 in the overall industry just behind Resona Holdings Inc , which has 39.9 trillion yen in assets.

Shares of Chuo Mitsui finished down 2.2 percent, while Sumitomo Trust fell 0.8 percent. Tokyo's index of banking stocks closed 0.6 percent lower. (Reporting by David Dolan; Editing by Chris Gallagher)