Three Malaysian lenders yesterday confirmed that a proposed US$20 billion (S$26.7 billion) merger plan to create the country's biggest bank has been scrapped "in the light of current economic conditions".

CIMB Holdings, RHB Capital and Malaysia Building Society (MBSB) said in a statement that "they have ceased discussions on a proposed merger and creation of a mega Islamic bank".

People with knowledge of the matter said on Tuesday that the terms for the deal, announced last October, no longer made sense, as the outlook for the banking industry had worsened.

CIMB is Malaysia's second-biggest lender, and RHB, its fourth-largest. The third party was small lender MBSB.

The Islamic bank business was a key part of the planned merger deal.

"We had thoroughly deliberated the merger and, whilst we remain convinced that the combination of our three franchises follows sound strategic logic, we ultimately we're not able to arrive at a value-creating transaction for all stakeholders," CIMB's acting group chief executive Zafrul Tengku Abdul Aziz said in the statement.

"The decision to cease discussions was arrived at after a detailed review of potential synergies that could be realistically delivered, especially in the current economic environment," he said.

The merger would have formed a banking group with assets of about US$190 billion, eclipsing Malayan Banking and making it South-east Asia's fourth-biggest bank, after Singapore's DBS, OCBC and United Overseas Bank.

The deal, backed by the Malaysian government, was part of an ambitious plan to promote its firms as regional champions.

Said Mr Kellee Kam, RHB's group managing director: "We undertook the discussions of the proposed merger on the premise that we would be able to arrive at a value-enhancing proposal for our stakeholders and bring it to our respective shareholders.

"Protecting and creating stakeholder value is paramount to all parties and, given the changes in environment, we could not conclude a case to proceed further."