updated 8/12/2004 12:54:55 PM ET 2004-08-12T16:54:55

Two of Japan's largest banks, Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc., agreed Thursday to a merger that would form the world's biggest bank, with assets of nearly $2 trillion.

The banks' presidents said the integration of holding companies, banks, trust banks and securities companies would be completed by Oct. 1, 2005, subject to authorities' approval. Financial terms were not disclosed, although Mitsubishi Tokyo previously had offered UFJ as much as $6.3 billion.

"We are very happy to be able to announce this basic agreement. We believe we are entering a new stage," UFJ Holdings President Ryosuke Tamakoshi said.

The holding company will be called Mitsubishi UFJ Holdings, with specific stakes to be determined later, both sides said. Tamakoshi will become chairman of the new holding company while Mitsubishi Tokyo President Nobuo Kuroyanagi will become president, they said. Branch closures and job cuts were not discussed.

With combined total assets of about $1.7 trillion, the combination of UFJ and Mitsubishi Tokyo would create the world's largest bank in terms of assets, surpassing U.S.-based Citigroup Inc.'s $1.19 trillion.

The announcement came a day after the Tokyo High Court reversed a July 27 decision by a lower court ordering a halt to merger talks between Mitsubishi Tokyo and UFJ.

Another bank, Sumitomo Trust, sought an injunction against the merger, citing an earlier agreement it had to buy UFJ's trust banking operations. UFJ scrapped that deal when it began merger talks with Mitsubishi Tokyo last month.

Sumitomo says the trust banking deal is legally binding, and it is appealing to Japan's Supreme Court.

Complicating the issue, Osaka-based UFJ has another bank courting it for a possible merger _ Sumitomo Mitsui Financial Group, which includes Sumitomo Trust. Sumitomo Mitsui put in its bid earlier this week.

Tamakoshi said Thursday he has not yet decided when to formally reject Sumitomo Mitsui's bid.

Mitsubishi Tokyo said late Wednesday it was ready to offer as much as $6.3 billion to help struggling UFJ. Sumitomo Mitsui had offered $4.5 billion.

But Kuroyanagi repeatedly denied that Sumitomo Mitsui's offer had affected Thursday's deal. Much of it was already decided but the announcement had to be postponed because of the court proceedings, he said.

Tamakoshi said he chose Mitsubishi Tokyo over Sumitomo Mitsui not solely because the money offer was greater but mainly because he had been in talks with Mitsubishi Tokyo first. But he also said that UFJ had carefully considered the Sumitomo Mitsui offer, including possible value for investors.

Standard & Poor's Ratings Service said Thursday that the capital injection from Mitsubishi Tokyo will strengthen UFJ's credit worthiness, but the financial risk may increase for Mitsubishi Tokyo. It kept both banks on credit watch with negative implications, citing the Supreme Court appeal by Sumitomo Trust as an uncertainty.

Analysts and the Tokyo stock market have generally welcomed the possible merger as a stabilizing force for Japan's financial system.

UFJ, Mitsubishi Tokyo and Sumitomo Mitsui are three of Japan's "Big Four" banking groups. Although the other three posted profits for the latest fiscal year, UFJ recorded a loss of nearly $3.6 billion.

Kuroyanagi said he hopes the new financial group will become more globally competitive, first by shoring up its business in Japan, and then doing business with Japanese companies with international operations. It will then be able to build on that experience to do business with non-Japanese clients, he said.

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