Canada's Bank of Nova Scotia will form an alliance with Malaysia's biggest state pension fund to acquire a one-third stake in financial group Rashid Hussain, a report said.

The Edge business weekly said Bank of Nova Scotia Bhd and the Employees Provident Fund (EPF) would take over Utama Banking Group's 32.8 percent stake as well as loan stocks in Rashid Hussain.

The EPF, which has RM260 billion in assets, currently owns 31 percent of Rashid Hussain. Rashid Hussain controls RHB Capital Bhd which in turn owns RHB Bank Bhd, Malaysia's fourth largest lender.

Nova Scotia has been operating in Malaysia for the past 31 years. It operates a single branch.

The Edge said EPF could pay close to one billion ringgit for the shares and loan stocks.

EPF is expected to bring in Nova Scotia as a partner, said the financial weekly. It did not elaborate.

"Bank of Nova Scotia Bhd is the foreign partner teaming up with the Employees' Provident Fund to take over Utama Banking Group's stake in Rashid Hussain Bhd," it said, citing industry sources.

The Edge said RHB Bank's branch network would allow Nova Scotia to extend its reach and expand its earnings in Malaysia.

A sweeping programme launched in 2001 merged Malaysia's 54 banks and finance houses into nine groups. The central bank wants a second wave of consolidation to leave between six and eight banks ahead of full market liberalisation in 2007.

The government has said more mergers are crucial for the survival of local banks because foreign banks are increasing their market share despite operational limitations.