Japan's Sumitomo Mitsui Banking Corp is in advanced talks to buy a $1.2 billion stake in BTPN, an Indonesian lender backed by TPG Capital, people familiar with the matter told Reuters.

SMBC's pursuit of Indonesia's seventh-largest bank by market value is another example of a Japanese company seeking to grow its business in the country's fast growing financial services market. A sale by TPG would also provide another case of a U.S. private equity investor raking in a massive profit from an early investment in an Asian financial institution.

In 2008, TPG acquired a 71.6 percent stake in the Indonesian pensioners' savings bank, named Bank Tabungan Pensiunan Nasional Tbk (BTPN) , for $195 million. The private equity firm's stake dropped to 58.5 percent after a rights offering in 2010.

SMBC, a unit of Japan's third-largest lender by assets Sumitomo Mitsui Financial Group <8316.T>, is currently negotiating to buy 40 percent of TPG's stake, allowing it to abide by Indonesia's new foreign ownership limits for banks, the people added. The 40 percent stake in currently valued at $1.2 billion, based on Friday's stock price of 5,050 rupiah.

SMFG and TPG declined comment.

Sources declined to be identified as the discussions were confidential.

(Reporting by Denny Thomas and Taiga Uranaka; Additional reporting by Stephen Aldred, Saeed Azhar and Janeman Latul; Editing by Michael Flaherty and Gary Hill)