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Shinsei Bank and Aozora Bank will cancel their merger plan concluded last July, it was decided at their board meetings Friday, due largely to differences over what business strategies they should follow after the tieup.

Shinsei Bank reported the same day it remained in the red in fiscal 2009 for the second consecutive business year with a group net loss of ¥140.15 billion, while Aozora said it swung back into the black with a group net profit of ¥8.3 billion, beating its earlier projection in January of a ¥7 billion profit.

In fiscal 2008, Shinsei logged a net loss of ¥143.08 billion and Aozora incurred ¥242.55 billion in net loss.

The merger talks hit a snag in working out a business strategy, including systems integration and choice of core operations. Although the two had set the merger ratio at 1-to-1, Shinsei’s continued losses apparently have eliminated the conditions that would warrant a merger on an equal footing.

They will now consider forming a new business alliance, the banks said, without providing details.

Shinsei tapped Isuzu Motors Ltd. Director Shigeki Toma, 61, as its president to succeed President and Chairman Masamoto Yashiro, 81, who is scheduled to resign following a shareholders meeting in June.

“We canceled the merger plan, but intend to cooperate in areas we can,” Yashiro said at a news conference, admitting the merger agreement reached last July was hasty.

He also said there was a gap between the two lenders’ ideas on capital, as well as how to integrate their banking systems. “This past year and a half, I faced the most difficult task in my business career,” which he said began over half a century ago.

The two banks, which incurred huge losses amid the global financial crisis, reached a basic merger accord last July with the aim of restoring their financial health and turning around their business.

Aozora President Brian Prince said at a separate news conference that from the bank’s perspective, the merged entity’s envisioned capital ratio was “unacceptable.”

On the possibility that Aozora will resume talks with Shinsei in case the latter clears necessary capital requirements, Prince said, “Yes.” If so, the talks may be resumed with new terms and conditions, such as “an improved capital ratio as well as a new merger ratio,” he said.

As to the resumption of merger talks, incoming Shinsei President Toma also said, “We do not rule out any possibilities if there is merit.”

Shinsei plans to raise up to ¥100 billion in capital by the end of this fiscal year to strengthen its capital base, Yashiro said.

Prior to Shinsei’s earnings announcement Friday, financial services minister Shizuka Kamei, commenting on its expected poor performance, said, “The government should have conducted tougher supervisions” over the struggling bank.

“The Financial Services Agency should also be questioned about what it was doing in relation to the bank’s massive red ink for the second straight year.”

Kamei also said he “scolded” agency officials for just “watching (the situation) silently.”

The financial watchdog is expected to issue a business improvement order to Shinsei due to its dismal performance.

Shinsei was created from the ashes of Long-Term Credit Bank of Japan, which failed in 1998 during Japan’s banking crisis. Aozora’s predecessor, Nippon Credit Bank, also went bankrupt in 1998. The two lenders were bailed out by the government with public funds, and the two banks still owe ¥400 billion in total of the public funds.

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