UPDATE 2-China Merchants Bank plans $3 bln rights offer-sources

* Investment banks formally pitching for deal

* $3 bln offer would be split between H and A shares

* Offer would be one of the largest in HK this year

* Hong Kong-listed shares fall 4 pct, track weakness in banks (Adds analyst quote in paragraph 6,7 share price movement)

By Michael Flaherty and Clare Jim

TOKYO/HONG KONG, July 8 (Reuters) - China Merchants Bank (3968.HK) plans to raise about $3 billion through a rights offering by the end of the year, aiming to boost its capital after overpaying for a recent acquisition, investment banking sources said.

The issue would be one of the largest in Hong Kong this year, and comes as corporate capital raising in Hong Kong's and China's stock markets picks up steam following gains in equities in the second quarter.

Several investment banks had begun formally pitching China Merchants (600036.SS) for mandates to handle the offering, the sources said on Wednesday, speaking on condition of anonymity.

The offering would be split between holders of China Merchants' Shanghai-listed A shares and its Hong Kong-listed H shares, they said, adding the bank was pursuing a rights offering over other kinds of offers due to its dual-listing.

An investor relations officer at China Merchants, China's sixth-largest lender, said only that the bank was studying the issue, but had no concrete plans.

China Merchants' Hong Kong-listed shares fell as much as 4.5 percent and ended down 3.7 percent, in line with a decline in bank shares and versus a 0.8 percent for the broader market .HSI. The company's Shanghai-listed shares lost 1.9 percent in a broader market .SSEC down 0.3 percent.

Despite the negative stock reaction, Kim Eng Securities analyst Ivan Li called the development generally positive.

IMPROVING CAPITAL ADEQUACY RATIO

"A rights offering can strengthen the bank's capital base," he said," adding that the new funds would boost the bank's capital adequacy ratio to 9 percent, similar to its peers, from a current level of around 6.6 at the end of last year.

Rights offerings are stock issues to existing shareholders, priced at a discount. Such offerings usually take a few months to structure, and are relatively easy to manage because they only involve existing shareholders.

While shareholders can rebel against such offerings, most rights issues have succeeded in Asia in the last year with little problems.

Sources cautioned that no banks had yet been mandated, and the $3 billion target for the offering could change. That figure compares with a total market capitalisation of about $48.5 billion for China Merchants' A and H shares combined, according to Reuters calculations.

The sources said they expected the company to soon indicate which banks it would like to handle the offering.

Earlier this year, China Merchants said it would book a provision against its $4.7 billion acquisition of Hong Kong's Wing Lung Bank in 2008. [ID:nPEK350559]

A rights offering by China Merchants would be the largest since HSBC (0005.HK) (HSBA.L) in April raised $19 billion in a rights issue to help it overcome losses in the United States. [ID:nL5132835]

Share issues in Hong Kong and China have picked up amid recent rallies in both markets, following months of little or no activity at the height of the global financial crisis.

In one of the biggest rights issues since the pick-up began, China Resources Land (1109.HK) said in May it would sell HK$4.3 billion ($551 million) worth of new shares to a major shareholder, raising capital for future acquisitions for its land bank and for working capital. [ID:nHKG231277] (Additional reporting by Samuel Shen in Shanghai; Writing by Doug Young; Editing by Chris Lewis and Anshuman Daga)