The CIMB Group, RHB Capital and Malaysia Building Society (MBSB) have agreed on their merger plans, paving the way to the creation of Malaysia's largest banking group and one of the largest financial institutions in Asean.

An application to Bank Negara Malaysia, the country's central bank, has been made to seek approval for the proposed three-way merger, the three institutions announced in a joint statement.

The merger will see a share swap between CIMB Group and RHB Capital at an exchange ratio of 1.38 (1 RHB capital share for 1.38 CIMB Group share). The ratio is based on the benchmark price of 7.27 ringgit per share of CIMB group, which represents a price-to-book ratio of 1.70x, and 10.03 ringgit per share of RHB Capital, which translates to a price-to-book ratio of 1.44x.

As part of the agreement, CIMB shareholders will own 70% of the merged CIMB-RHB entity, with RHB shareholders owning remaining 30%.

Concurrently, the Islamic entities of the two banks, CIMB Islamic and RHB Islamic, will merge with MBSB at a price of 2.82 ringgit per MBSB share, creating a mega-Islamic bank.

Shareholders of MBSB will have the option of receiving cash or CIMB Islamic shares as consideration. The proposed mega-bank will remain a subsidiary of the merged CIMB-RHB group.

The three banks expect to sign a definitive sale and purchase agreements in early 2015, following a due diligence process. The deal, which will require approval from regulators and shareholders, is seen to be completed in mid-2015.

"This exercise will cement CIMB Group's position among the top banks in Asean and bring a host of value creation opportunities for all our stakeholders," said Zafrul Tengku Abdul Aziz, acting CEO of CIMB Group.

The agreement comes three months after the banks announced their merger plans in July, when they received an approval from Bank Negara to start negotiating the terms of the deal.

The transaction, if completed, would give rise to the largest banking group in Malaysia with assets of around US$190 billion, surpassing Maybank, making it the fourth-largest bank in Southeast Asia in terms of asset size.

As such, it has put pressure on Maybank to look for possible target for acquisition to defend its leadership position in Malaysia's banking industry. But there are only few deals that could get done in Malaysia. The market is already pretty consolidated, says an observer.

While in paper, one could think of Public Bank as a potential for takeover, given the concerns over its lack of succession plans with the seniority of its founder and chairman Teh Hong Piow, the fact that the stock is trading at 3.6x tangible book value makes it the most expensive bank to be acquired, and thus almost untouchable. Another potential target seen is Ambank where Australian lender ANZ owns 24% of stake.

The proposed merger comes three years after CIMB and Maybank were forced to walk away from their respective plans to acquire RHB Capital, scrapping what would have been one of the biggest corporate battles in the history of the Malaysian market.