UPDATE 2-SMFG's chances of buying Permata improve after Singapore banks drop out-sources

* OCBC, DBS exit from race to buy Indonesian bank - sources

* Japanese banks keen to snap up assets outside home market

* Permata is mid-sized lender in fragmented market

* Permata valued at $2.4 bln after rallying 80% this year (Recasts, adds details from para 10 onwards)

By Anshuman Daga and Takashi Umekawa

SINGAPORE, Nov 15 (Reuters) - Sumitomo Mitsui Financial Group's (SMFG) chances of snapping up Indonesia's PT Bank Permata have improved after two key rivals dropped out of the race to buy the $2.4 billion-valued lender, sources said on Friday.

One of the sources said SMFG was in advanced talks to negotiate terms for the purchase of the mid-sized bank, in which Standard Chartered and Indonesian conglomerate PT Astra International each own a 45% stake.

But he said SMFG had not secured exclusivity terms.

While Singapore lenders OCBC Group Holdings and DBS Group Holdings had shown interest in the auction for Permata, they are no longer pursing it, according to several sources familiar with the matter, who declined to be named because they were not authorised to talk to the media.

Standard Chartered, SMFG, OCBC and DBS declined comment, while there was no response from Astra to a Reuters query.

Takeover interest in Permata gained ground this year after StanChart said in February its investment in the bank was no longer core, signalling it was open to selling its stake. Permata shares have surged about 80% so far this year.

Reuters reported last week that SMFG and OCBC were working on competing offers and were seen as the frontrunners for Permata.

Sources had previously said that in addition to SMFG, Southeast Asian banks were interested in Permata, but high price expectations were discouraging some suitors.

Reuters was not able to ascertain if any other bidders were in the race.

Established in 1955, Permata operates about 320 branches in Southeast Asia's biggest economy, home to about 100-plus lenders.

Analysts at Citi said in a report last month that Permata could boost the assets and distribution presence of any of the three Singapore-listed banks' Indonesian operations, but highlighted some concerns for them.

These included: "A likely multi-year rationalization to manage network duplication and derive cost synergies to drive a meaningful return on investment."

Japanese banks have been keen investors in overseas markets, particularly in Asia, as they struggle with prolonged low interest rates at home and a shrinking population.

SMFG completed the purchase of mid-sized Indonesian lender PT Bank Tabungan Pensiunan Nasional Tbk this year.

Bigger rival Mitsubishi UFJ Financial Group bought a 94% stake in PT Bank Danamon Indonesia in phases, starting from late 2017, in deals that valued the lender at more than $6 billion. (Reporting by Anshuman Daga and Takashi Umekawa; Additional reportingby Fransiska Nangoy in Jakarta; Editing by Raju Gopalakrishnan and Mark Potter)