HSBC Bolsters Its Saudi Presence With RBS Bank Merger

  • Alawwal and Saudi British to start talks on combination
  • HSBC advising Aramco on what could be world’s largest IPO

HSBC Holdings Plc is set to strengthen its position in Saudi Arabia with the potential merger of its local venture with Royal Bank of Scotland Group Plc’s.

RBS’s Alawwal Bank and HSBC’s Saudi British Bank are exploring a potential merger to create the country’s third-largest lender with $78 billion in assets, they said Tuesday, without revealing details of the possible tie up. Analysts are already predicting the combination could lead to HSBC’s takeover of RBS’s stake in the merged entity, handing the Scottish lender a long-awaited exit.

The combination will establish HSBC “as a bigger player in the market and they may take up RBS’s stake as well at a later stage,” said Muhammad Potrik, head of research at Riyad Capital. “HSBC is not looking at exiting the kingdom because they have a lot of business on the capital markets side, asset management, brokerage and obviously investment banking.”

HSBC is already one of the most active international investment banks in the kingdom through its local unit -- HSBC Saudi Arabia. The lender is advising state-oil company Saudi Aramco on what could be the largest ever share sale, and has been the country’s top adviser for IPOs since 2010, according to data compiled by Bloomberg. SABB’s $49.6 billion of assets dwarf Alawwal’s $28 billion. HSBC and RBS declined to comment.

RBS Exit

“This merger could end up with HSBC acquiring RBS’s share, given that the latter has been trying to exit Saudi Arabia for some time,” said Monsef Morsy, head of financial analysis at CI Capital in Cairo. “HSBC has been working closely with the government on several parts of its privatization and fundraising plans.”

HSBC had lead roles on the kingdom’s record-breaking $17.5 billion bond sale last year and $9 billion Islamic bond this month. HSBC Saudi Arabia has also been appointed to advise the government on the partial privatization of Saudi Arabia’s Grain Silos and Flour Mills Organization, as well as the privatization of the Saudi stock exchange. The U.K. lender holds a 40 percent stake in SABB, and a 49 percent share in HSBC Saudi Arabia.

Diluted Stakes

If a merger goes ahead, the new bank would dilute the stakes of HSBC and RBS to 29 percent and 11 percent respectively, making it easier for RBS to find a buyer, Jaap Meijer, head of research at Arqaam Capital Ltd., said in a note Wednesday. Saudi Arabia’s Public Investment Fund and foreign investors are the most likely buyers of the holding, Meijer said.

Alawwal was known as Saudi Hollandi Bank until last year and the venture was acquired by RBS in its 2007 joint purchase of the Netherlands’ ABN Amro. Since then the U.K. lender, which has been owned by the British state for almost a decade after a government bailout, has been shrinking and selling assets to focus on its home market amid annual losses and tougher capital requirements.

Shares Jump

Investors trading on the Tadawul on Wednesday also saw the potential merger as beneficial for Alawwal. Shares jumped 8.3 percent to close at 11.35 riyals in Riyadh, the highest level since Feb. 19, while SABB shares ended 5.7 percent higher at 22.88 riyals, the highest since January.

“Of the two, SABB is relatively stronger and more profitable franchise, with meaningful skew towards corporates," said Aarthi Chandrasekaran, vice-president for research at Shuaa Capital PSC in Dubai. The bank also has “a better capital base and a superior cost efficiency in the industry."

(Corrects name of company in third paragraph in story first published April 25.)
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