Malaysia to scrap $20bn bank merger

Kuala Lumpur - Malaysia will scrap a proposed $20bn merger that would have created the country's biggest bank, after CIMB Holdings and RHB Capital failed to agree on new deal terms, people familiar with the matter said.

The merger would have formed a banking group with assets of about $190bn, eclipsing Malayan Banking Bhd (Maybank) and making it Southeast Asia's fourth-biggest bank. The state-backed deal was part of Malaysia's ambitious plan to promote its firms as regional champions.

The scrapping of the deal is a major blow for CIMB chairperson Nazir Razak, the brother of Malaysian Prime Minister Najib Razak. Nazir spearheaded the bank's expansion over the past 16 years, snapping up a domestic rival, lenders in Indonesia and Thailand and businesses owned by Royal Bank of Scotland.

CIMB shares had tumbled more than 26% between Monday and the launch of the deal in early October, as investors questioned CIMB's ability to extract synergy from the deal.

"We have been cautious on the mega-merger proposal, especially on synergy creation vis-a-vis the high merger cost," Tan Ei Leen, analyst with Kuala Lumpur-based Affin Hwang Capital, wrote in a note to clients on Monday.

The CIMB share price fall dimmed the deal's appeal, prompting RHB to seek an improved share swap ratio, and possibly cash, people familiar the with the situation said. A central bank directive against CIMB retrenching people for 24 months after the merger also posed difficulties.

On Tuesday, CIMB rallied as much as 11.4% as investors breathed a sigh of relief that the deal was finished. RHB gained 1.9%, while RHB was up 0.2%. Malaysia's benchmark share index was up 0.4%.

An announcement cancelling the deal could come as early as Wednesday evening after CIMB board meeting, two people familiar with the matter said.

RHB said there were no developments in relation to the merger, while CIMB and MBSB declined to immediately comment.

The collapse of the deal raises concerns about Malaysian bank governance after state investor 1Malaysia Development Bhd (1MBD) missed the repayment of a $563m bridge loan that was due end-December.

The bank troubles come as Malaysia's economy faces sharp falls in oil-related revenue, prompting Bank of America Merrill Lynch economists to warn last month the government might be forced to cut its gross domestic product growth forecast for 2015 to 4.6% from 5% in 2015.