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Strategy and capitalisation issues are stalling merger talks between Japanese lenders Shinsei Bank Ltd. and Aozora Bank Ltd. The Wall Street Journal reports that the two banks began merger talks on the condition that if either party was not satisfied with the capital structure of the combined entity then the deal will not push through.

But Shinsei's CFO Rahul Gupta is hoping the right outcome is reached soon, acknowledging that the $.4.9 billion merger deal is progressing slowly because of the number of issues that need to be resolved.

According to the Journal, a major driver in the planned merger is Shinsei's need for capital, adding that the merger plan was forged in the midst of the financial crisis when both banks fell into the red. The newspaper reveals both banks have already returned to profitability, but they have a wide difference in capitalisation. Aozora had a Tier 1 ratio – a measure of bank balance sheet strength -- of 14.24% as of Sept. 30, nearly double Shinsei's ratio of 7.83% as of Dec. 31.

The cost savings of the merger could be significant and would include reducing headcount and IT systems, says the Journal.

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