* Sale values VietinBank at $3.7 billion
* Japanese banks look to SE Asia for growth
* Deal is largest in Vietnamese banking industry (Adds details on deal, VietinBank bonds)
HANOI, Dec 27 (Reuters) - VietinBank, Vietnam's second-biggest partly private lender by assets, will sell a 20 percent stake - the biggest available to foreign investors - to Japan's Bank of Tokyo-Mitsubishi UFJ for 15.46 trillion dong ($743 million).
The Hanoi-based bank will issue new shares to the Japanese lender, VietinBank said in a statement on Thursday, in Vietnam's largest-ever bank merger and acquisition deal. As part of the deal, the Japanese bank will have two seats on Vietin's board.
The deal values VietinBank at $3.7 billion, a near 45 percent premium to its current market value of $2.56 billion. Vietcombank, or The Bank for Foreign Trade of Vietnam, has a market value of about $3 billion.
Japanese financial companies have been expanding their presence in the Southeast Asia economy. Last year, Mizuho Financial Group Inc's agreed to buy a 15 percent stake in Vietcombank for $567 million and Sumitomo Mitsui Financial Group Inc's $225 million purchase of a 15 percent stake in Vietnam Export Import Bank in 2008.
Bank of Tokyo-Mitsubishi UFJ is a core banking unit of Mitsubishi UFJ Financial Group, Japan's largest lender by assets.
MUFG, which owns California-based Union Bank, and rival Japanese banks are looking to expand their operations in Southeast Asia by acquiring stakes in local players.
Taking advantage of European rivals' struggles at home, Japan's top banks are enjoying sharp growth in overseas corporate lending and infrastructure project finance.
A major challenge for Japanese banks is to build full-scale retail operations in Asia given lack of branch networks outside Japan.
To further develop Bank of Tokyo-Mitsubishi UFJ's Asian business, the new partnership will support Japanese companies operating in Vietnam, Bank of Tokyo-Mitsubishi UFJ President Nobuyuki Hirano said in the statement.
VientinBank bonds have been on a roll since the end of November. The yields on the 8 percent bonds due 2017 have fallen from a high of 9.1 percent to the current level of just below 8 percent.
The bank's debut offering in May was the first by a Vietnamese bank, but the bonds had a patchy run before the latest rally, mainly due to the macro concerns about Vietnam's economy.
The bonds are rated B1 by Moody's, B+ by S&P and B by Fitch. They range eight to 10 notches below MUFG bonds which are rated A+ by S&P, Aa3 by Moody's and A- by Fitch.
($1 = 20845.0000 Vietnam dong) (Reporting by Hanoi Newsroom and Taiga Uranaka in TOKYO; Editing by Paul Tait and Matt Driskill)