SINGAPORE/KUALA LUMPUR (Oct 9): Malaysia's CIMB Group Holdings Bhd and two smaller domestic lenders have agreed to create the country's biggest banking group, with deal terms set to be worked out over the next year, sources with direct knowledge of the matter said.

Proposals submitted to the central bank call for CIMB, Malaysia's No. 2 banking group, to be combined with RHB Capital Bhd, the country's fourth-biggest lender, via a share swap, the sources said.

Malaysia Building Society Bhd (MBSB) may be acquired through a cash and shares deal, one of the sources said.

The pact comes after the banks unveiled in July they were in talks to merge. A three-way combination would give birth to a banking group with assets totalling around $190 billion, surpassing Malayan Banking Bhd (Maybank) and making it Southeast Asia's fourth-biggest bank.

The planned merger comes as members of the Association of Southeast Asian Nations slowly work on plans to partially integrate their economies and financial systems. Although little progress has been made and financial system integration is not due to start until 2020, countries in the 10-nation alliance are keen to build national champions.

Shares of the three banks were suspended on Thursday pending an announcement.

Representatives for CIMB and Malaysia Building Society declined to comment. RHB did immediately respond to a request for comment.

Sources declined to be identified as they were not authorised to talk to the media.

The Islamic banking arms of RHB and CIMB would merge with Malaysia Building Society to form a bigger Islamic bank, according to one of the sources.

CIMB and RHB are also discussing the sale of RHB's investment banking unit, the sources said.

Malaysia's Employees Provident Fund (EPF), a big shareholder in all three banks, is seen as instrumental in deciding how the merger will be shaped.

The EPF owns about 41 percent of RHB, 65 percent of Malaysia Building Society and 14.5 percent of CIMB.

JPMorgan is advising CIMB, Credit Suisse is advising RHB, while EPF has hired Deutsche Bank as an advisor and Malaysia Building Society is being advised by Citigroup, the sources said.

The investment banks have all declined to comment on whether they have been hired. The EPF has not responded to requests for comment.