UPDATE 6-Sumitomo Trust, Chuo Mitsui say to merge

* Combined assets under management of $640 billion

* Share swap set for April 2011, full merger year later

* Analyst: Trust bank market is "oversupplied"

* Sumitomo Trust shares end down 0.8 pct, Chuo falls 2.2 pct (Adds Chuo Mitsui president comments, S&P report)

By David Dolan

TOKYO, Nov 6 (Reuters) - Sumitomo Trust and Banking Co Ltd (8403.T) and Chuo Mitsui Trust Holdings Inc (8309.T) said they plan to merge, creating Japan's largest trust bank with a scale to better compete in a crowded asset management industry.

Sumitomo Trust, Japan's fifth-largest bank, and sixth-ranked Chuo Mitsui said they planned to exchange shares on April 1, 2011, and form a holding company. The merger will likely be completed by April 2012, with the bank to be called Sumitomo Mitsui Trust Bank, the two firms said in a release.

A merger ratio will be decided at a later date.

The combined bank would have 58 trillion yen ($640 billion) in assets under management, including corporate pension funds and investments, making it Japan's largest asset management 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 (STT.N) and Bank of New York Mellon (BK.N), and also face pressure from the major domestic lenders at home, Katkov said.

Chuo Mitsui President Kazuo Tanabe acknowledged the challenges in the domestic market, but said the bank was not looking for tie-ups with Japan's top three lenders, often referred to as "megabanks".

"The new group has no intention of joining any of the megabanks," he told a news conference.

Both Sumitomo Trust and Chuo Mitsui have distant ties to Sumitomo Mitsui Financial Group (8316.T), but are not part of Japan's third-largest banking group.