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Shinsei Bank and Aozora Bank are ditching the agreement they announced last July to merge in October, according to sources.

The two banks have not been able to reconcile their differences over what business strategies they should follow once they merge, the sources said.

The two had set the merger ratio at 1-to-1 and Aozora became wary because Shinsei is booking a group net loss in fiscal 2009 for the second consecutive year, thus eliminating the conditions that could warrant a merger on an equal footing, they said.

Shinsei plans to revise downward its earnings forecasts for fiscal 2009 after the Golden Week holidays in early May. The bank is expected to change its earnings projection to a ¥150 billion loss from an initially forecast ¥10 billion profit.

Shinsei is expected to announce a nullification of the merger accord May 14, when it plans to release earnings results for the 12-month period to March 31.

The bank is booking a mammoth net loss as the Financial Services Agency told it to book more credit costs after inspectors examined the quality of its outstanding loans to nonbank lenders and real estate companies, the sources said.

Aozora is expected to formally demand a review of the merger ratio after Shinsei revises its earnings results for the fiscal year.

But Shinsei has said it will not accept any change in the ratio.

Shinsei was created from the ashes of the Long-Term Credit Bank of Japan.

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