First Bank Merger in 20 Years Sets Saudi Up for More Deals

  • HSBC, RBS ventures in Saudi Arabia exploring combination
  • Saudi banks and firms may be enticed to follow Alawwal, SABB

A combination of the Saudi Arabian ventures of HSBC Holdings Plc and Royal Bank of Scotland Group Plc will break an almost 20-year drought for mergers and acquisitions in the country’s banking industry that may spur more deals across the kingdom.

The potential merger of HSBC’s Saudi British Bank and Alawwal Bank comes as lenders in the Persian Gulf’s biggest economy grapple with slowing growth and uncertainty around a government plan to reduce its dependence on oil, which is weighing on demand for loans. At the same time, the country’s overhaul presents an opportunity for banks to get in on major deals, like the listing of Saudi Arabian Oil Co., in what could be the largest-ever initial public offering.

1. What’s the logic?

Although the banks did not say why a merger is being considered, a combination would create a stronger lender with a bigger market share at a time when demand for loans by the private sector has largely stalled.

A successful transaction would enable RBS to divest from its Alawwal stake, which it has sought to do for years. It would also help improve efficiencies and synergies by reducing funding costs and other general and administrative expenses, said Ali Adou, a money manager at The National Investor in Abu Dhabi.

2. Whose Next?

The kingdom’s Banque Saudi Fransi might be the next M&A candidate as its main shareholder -- Credit Agricole AG -- has been considering selling its 31 percent stake for some time, according to Shuaa Capital PSC’s vice-president for research Aarthi Chandrasekaran.

A combination of Alawwal and SABB would create the seventh-largest bank by market value in the six-nation Gulf Cooperation Council and mirror the trend seen in other countries. National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC last month completed a merger to create the United Arab Emirates’ largest bank with assets of $180 billion. Qatar’s Masraf Al Rayan QSC, Barwa Bank QSC and International Bank of Qatar QSC announced plans for a three-way merger last year.

3. Why do some banks want in, while others want out?

The lack of buyers for RBS reflects concerns about prospects under Saudi Arabia’s ambitious reform program, as Deputy Crown Prince Mohammed bin Salman cuts back government spending that’s traditionally buoyed the economy. At the other end, RBS, which has been owned by the British government for almost a decade, has been shrinking and selling assets to focus on its home market to cope with falling profit margins and tougher capital requirements.

Others have been investing in Saudi Arabia in preparation for an expected fee bonanza amid planned sales of hundreds of state assets, debt issues and the creation of the world’s largest sovereign fund in a bid to repair state finances. Citigroup Inc. on Tuesday said it received an investment banking license from the kingdom’s regulator after a 13-year absence.

4. How would a deal impact RBS’s stake-sale plans?

The merger should make it easier for Royal Bank of Scotland Group to find a buyer for its share in Alawwal as a smaller stake in a stronger and larger entity would be more attractive. Saudi Arabia’s sovereign fund or foreign investors are perhaps the most likely buyers of the $1.3 billion stake, said Arqaam Capital Ltd. Managing Director Jaap Meijer, who doesn’t think HSBC is likely to buy out RBS.

5. How have the banks performed?

The market has been challenging for lenders across the Gulf. Alawwal Bank, which used to be known as Saudi Hollandi, saw net income drop by half in 2016, while profit at SABB declined 10 percent. Both banks, which primarily lend to businesses, said non-performing loans to the construction industry almost tripled last year.

Their shares have also taken a hit. Alawwal’s stock lost 25 percent this year through April 25, when the merger plans were announced after trading had closed. SABB’s securities fell 12 percent.

6. How will the merger unfold?

So far, very little has been revealed about the merger. The Capital Market Authority requires that each company appoint external advisers to conduct due diligence studies and prepare separate reports to be presented to shareholders and boards of directors, according to Arqaam.

Indications are that the transaction could be concluded at current market prices with an exchange ratio of 1 SABB share for each 2.1 Alawwal stock, Arqaam’s Meijer said. The newly formed entity would dilute the stakes of HSBC and RBS to 29 percent and 11 percent, respectively, he wrote. 

Alawwal has said it does not expect any job losses should the deal be completed.

7. What would the combined entity look like?

The combined lender would become Saudi Arabia’s third-largest bank after National Commercial Bank and Al-Rajhi Bank with about $78 billion of assets. It would also have a market share of about 14 percent with a strong loan book, deposits and high-quality liquid assets, according Muhammad Faisal Potrik, the head of research at Riyad Capital.

-- with assistance from Filipe Pacheco.

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