By Yantoultra Ngui

SINGAPORE (Reuters) - Singapore's biggest lender DBS Group Holdings Ltd is exploring expanding into Malaysia with potential acquisitions of stakes in banks in its Southeast Asian neighbour, including in one of Malaysia's smallest banks by assets, two sources said.

DBS is exploring a purchase of Singapore state investor Temasek's 29.1% stake in Alliance Bank Malaysia Bhd, said the two sources with knowledge of the matter, a slice currently valued at about $460 million.

Temasek is biggest shareholder in DBS with a 28.9% stake, according to LSEG data.

Other options for expanding into Malaysia include buying Kuwait Finance House's Malaysian retail banking assets, worth more than $500 million and which have been put up for sale, one of the sources said.

Deliberations are in very early stages, however, the sources said, and any formal negotiations for an acquisition of a stake in a Malaysian bank would need approval from the Malaysian central bank, or Bank Negara Malaysia.

The two sources declined to be named as talks on the possible acquisitions were confidential.

"We do not comment on market rumours and speculation," said a spokesperson for DBS, Southeast Asia's biggest lender by assets. Temasek declined to comment.

Alliance Bank, the second smallest listed bank in Malaysia by total assets, and Bank Negara Malaysia did not respond to requests for comment after business hours on Friday.

Kuwait Finance House said the process for selling its retail banking portfolio in Malaysia was in preliminary stages, and that it was not able to share additional information.

DBS is the only Singaporean bank without a retail banking presence in Malaysia. Local rivals Oversea-Chinese Banking Corporation and United Overseas Bank both have retail banking operations in Malaysia.

DBS' plan to foray into Malaysia comes amid improving economic prospects for the Southeast Asian nation, with new infrastructure projects and investments expected to result in a surge in credit growth.

In the second quarter, Malaysia's economy expanded by an annual 5.9%, its fastest in 18 months, on higher household spending, exports and investment. Its monetary unit, the ringgit, is Southeast Asia's best-performing currency this year.

'BOLT-ON ACQUISITIONS'

DBS emerged as a regional banking powerhouse under outgoing Chief Executive Piyush Gupta's 15-year tenure, bolstered by acquisitions that established significant presences in markets including China, India, Indonesia and Taiwan.

DBS completed the acquisition of Citigroup's consumer banking business in Taiwan in August last year. In July, Gupta said DBS was looking for bolt-on acquisitions that would support further strategic expansion in the region.

Tan Su Shan, who heads up DBS' institutional banking group and is deputy CEO, will take over from Gupta in March next year, making her the first woman to lead the bank. On Thursday, DBS posted its highest ever quarterly net profit for July-September on record fee income.

DBS last attempted to buy Temasek's stake in Alliance Bank in 2012. Those plans did not go through because of regulatory hurdles, according to sources at the time.

The current Malaysian government under Prime Minister Anwar Ibrahim has been more forthcoming and open to ideas and investments with an aim to boost economic growth, said the sources with knowledge of DBS' plan for Malaysia.