Acquisition rumors about Royal Bank of Scotland's U.S. operations are swirling again.

RBS has had initial discussions with Japanese megabank Sumitomo Mitsui Financial Group about a possible deal for its $120 billion-asset RBS Citizens unit, the Wall Street Journal, citing anonymous sources, reported Monday. The talks are early and informal, the report said.

Such a deal would be an alternative to RBS' current plan of spinning out its U.S. unit through a series of public offerings set to begin later this year. RBS, which is predominately owned by the British government after a 2008 bailout, has been looking for ways to harvest capital and refocus its operations.

The Wall Street Journal noted that a deal for RBS Citizens by Sumitomo Mitsui would be among the biggest bank deals announced since the 2008 economic crisis and would likely be the largest ever foreign-bank purchase of a U.S.-based bank. It would also face significant regulatory scrutiny.

The potential combination goes against where current regulation is headed, Kamal Mustafa (pictured), chairman and CEO of Invictus Consulting Group in New York and former global head of M&A at Citigroup, told American Banker.

"It would be a bizarre combination," Mustafa says. "This is coming in an environment where big is not good. One of the objectives of Basel III was to limit bank growth."

In an emailed statement to American Banker, RBS says it is still pursuing its public offering. "We announced in November 2013 that we would accelerate the IPO of Citizens, aiming to start the process in the second half of 2014 and to fully sell the business by the end of 2016," a spokesman said. "That is our plan."

Bruce Van Saun, RBS Citizens' chief executive, discussed the steps the bank is taking to ready itself to be a standalone entity with American Banker at last week's Retail Banking 2014 conference.

Investment bankers have said that announcing public offerings are often an attempt to lure potential buyers. There have been several rumors about sales and partial sales about the business in the last few years. Shortly after RBS said it would begin divesting Citizens, Toronto-Dominion Bank was rumored to be interested, though it denied the speculation.

RBS has been willing to sell pieces of Citizens' business, though. Late last year, U.S. Bancorp (USB) said it would buy roughly 100 branches in the Chicago area for $315 million.

A call to Sumitomo Mitsui's New York office was not immediately returned.

Sumitomo Mitsui and Royal Bank of Scotland have negotiated before. In early 2012, the Japanese bank agreed to buy RBS' aircraft leasing business for $7.3 billion.

Sumitomo Mitsui's U.S. banking presence is limited, consisting of its ownership of a $1.7 billion trust bank in Hoboken, N.J., and the $2.3 billion-asset Manufacturers Bank in Los Angeles, according to the Federal Deposit Insurance Corp. Japanese rival Mitsubishi UFJ Financial owns the $105 billion-asset Union Bank in San Francisco.

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