Japanese banking battle at an end

UFJ Holdings has been at the centre of a fierce bid battle

Japan's Sumitomo Mitsui Financial has withdrawn its takeover offer for rival bank UFJ Holdings, enabling the latter to merge with Mitsubishi Tokyo.

Sumitomo bosses told counterparts at UFJ of its decision on Friday, clearing the way for it to conclude a 3 trillion yen ($29bn) deal with Mitsubishi.

The deal would create the world's biggest bank with assets of about 189 trillion yen ($1.8 trillion).

Sumitomo's exit ends the most high profile fight in Japanese bank history.

Admitting defeat

UFJ Holdings, Japan's fourth-largest bank, has been at the centre of a fierce bid battle over the last year.

Sumitomo, Japan's third-largest bank, tabled a higher offer for UFJ than its rival, valuing the company at $35bn.

Our proposal may not be in the best interests of our shareholders Sumitomo Mitsui Financial Group

However, UFJ's management was known to prefer the offer from Mitsubishi Tokyo Financial Group (MTFG), Japan's second-largest bank.

Concerns were also raised about Sumitomo's ability to absorb UFJ and the former has now admitted defeat.

"We believe the market and most investors accept a UFJ-MTFG merger," Sumitomo said in a statement.

"Given the ongoing integration of UFJ and MTFG operations, persisting with our proposal may not be in the best interests of our shareholders or UFJ's."

New targets?

Mitsubishi's takeover of UFJ - which will be Japan's largest-ever takeover deal - will still have to be approved by shareholders of the two firms.

However, this is expected to be a formality.

Sumitomo may now turn its attention to deepening its ties with Daiwa Securities, another Japanese financial firm.

The two are set to merge their venture capital operations and there has been speculation that this could lead to a full-blown merger.

Japanese banks are increasingly seeking alliances to boost profits.