Terms for the deal, announced in October, no longer make sense as the industry outlook worsens, said the people, who asked not to be named because deliberations are private. An announcement could come as soon as this week, one person said. The proposed combination also included the acquisition of smaller lender Malaysia Building Society Bhd.

The merger would have been Malaysia’s largest ever and was the biggest Asian M&A transaction announced in the fourth quarter, data compiled by Bloomberg show. CIMB and RHB had weighed renegotiating terms of the deal, valued at RM72.5 billion (US$20.2 billion) when it was unveiled, people familiar with the matter said last week.

The deal “is better off than on”, Geoffrey Ng, a Kuala Lumpur-based adviser for strategic investments at Fortress Capital Asset Management Sdn, which oversees about US$280 million, said by phone. “The overlaps in terms of operation and market coverage would have been too much. The redundancy that would have occurred would have been quite painful.”

CIMB rallies

CIMB shares surged 14.3 per cent, the most since February 2001, to close at RM5.92 in Kuala Lumpur. RHB advanced 0.9 per cent, while Malaysia Building Society slumped 5.9 per cent. The three banks have a combined market value of US$21 billion.

The Edge newspaper reported the plans to scrap the deal earlier today, citing unidentified people.

CIMB, RHB Capital and Malaysia Building said they are still in talks on the proposed merger, according to separate statements to the Malaysian stock exchange. CIMB said its directors will meet tomorrow to discuss the merger, while MBHB said it will hold a regular board meeting tomorrow. RHB said in its filing that it can’t provide further detail.

Reverse merger

The proposed transaction was structured as a reverse merger, with smaller RHB to issue shares to acquire CIMB, Malaysia’s largest bank. That method was seen as a way to overcome potential opposition from RHB’s second-largest shareholder, Aabar Investments PJSC, which paid RM10.80 a share when it bought its stake in 2011. RHB closed today at RM7.80.

CIMB shares had fallen 24 per cent through the end of last week since the deal was announced, double RHB’s drop. That disparity made the merger less attractive to RHB shareholders. Adding cash to woo RHB investors wouldn’t have been “palatable” to CIMB, Desmond Chng, an analyst at Maybank Kim Eng, wrote in a report yesterday.

One blow to the deal came in late October, when Malaysia’s stock exchange ruled that pension manager Employees Provident Fund couldn’t vote on it. The fund is RHB’s largest investor with a 40.9 per cent holding, and also owns stakes in CIMB and MBHB, data compiled by Bloomberg show.

Profit squeeze

CIMB said in November its third-quarter profit fell 16 per cent to RM890 million, hurt by higher loan impairments in Indonesia. RHB’s net income for the period slipped 2.5 per cent to RM545 million.

Winson Ng, CIMB’s banking analyst, in December recommended investors to be “underweight” on bank stocks. He said in a research report that “weak loan momentum” and narrower margins would hurt revenue growth.

The deteriorating economic outlook augurs poorly for loan growth and the banking industry. Last week, Barclays Plc cut its forecast for Malaysia’s 2015 economic growth to 4.5 per cent from 5.5 per cent amid a slump in commodity prices and the ringgit. — Bloomberg