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Why Saudi Banking M&A Awoke From a Two-Decade Slumber

After an almost 20-year drought in mergers and acquisitions among lenders in Saudi Arabia, a new deal may spur activity in the Middle East’s biggest economy. HSBC Holdings Plc affiliate Saudi British Bank, or SABB, is set to take over Alawwal Bank that’s backed by Royal Bank of Scotland Group Plc in a $5 billion stock deal. The merger will reaffirm HSBC’s position in the kingdom and may offer international lenders some insight on how to approach Saudi Arabia, which is opening up to overseas investment, but still blocks foreign control of banks.

1. Why were there no bank mergers for 20 years?

Lenders didn’t see a need to consolidate, partly because they have been well-capitalized and profitable, said Hans-Peter Huber, chief investment officer at Riyad Capital. There also aren’t that many of them -- 12 domestic banks and 14 licensed foreign banks, according to the Saudi central bank website, in a country of 32 million people. That’s among the fewest commercial banks per capita in the Gulf, said Aarthi Chandrasekaran, vice president at Shuaa Capital in Dubai.

2. What led to the Saudi British Bank-Alawwal merger?

RBS, which has been owned by the British government for almost a decade, has been trying for years to shed its stake in Alawwal as part of a global initiative to cut investment-banking operations to focus on consumer and commercial lending in its home market. HSBC is already one of the most active international banks in the kingdom through its local investment banking unit -- HSBC Saudi Arabia Ltd., in which the London-based lender owns a 49 percent stake -- and is looking to grow stronger yet. The bank 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 share sales since 2010, according to data compiled by Bloomberg. HSBC owns 40 percent of SABB, which, post-merger, would be the kingdom’s third-largest lender.

3. How is banking changing in Saudi Arabia?

The government plan known as Vision 2030 seeks to diversify the economy away from oil by increasing foreign investments. The plan calls, in part, for the country to become "a leader in competitively managing assets, funding and investment" through "the formation of an advanced financial and capital market open to the world, allowing greater funding opportunities and stimulating economic growth." Crown Prince Mohammed bin Salman, the son of King Salman, is the leading force behind the 2030 blueprint, which envisions turning the kingdom’s $450 billion-plus stock market into a gateway for foreign investment. The overhaul carries with it a short-term prize: the opportunity for banks to get in on the kingdom’s privatization plans.

4. Are more banks trying to enter Saudi Arabia?

In part. They are trying to position themselves for a boom in advisory work and corporate and consumer lending. Deutsche Bank AG has said it’s expanding in the kingdom, Citigroup Inc. recently won its first local IPO advisory mandate since returning to Saudi Arabia after a 13-year absence, and Goldman Sachs Group Inc. doubled its staff in Riyadh in preparation for deploying its own money in the kingdom for the first time.

5. Is there a reason some banks might stay away?

Yes. Many international banks are focusing on their domestic business and are selling non-core assets to strengthen their balance sheets. The sovereign credit rating of the international markets where the bank operates impacts capital requirements, according to EFG-Hermes banking analyst Shabbir Malik. “If the credit rating of Saudi Arabia is lower than the U.K. lets say, then its capital requirements would be higher for the Saudi business,” he said.

6. Are more bank mergers on the horizon?

Maybe. Edmond Christou of Bloomberg Intelligence says banks with weak capital ratios and/or limited lending capacity, including Bank Al-Jazira, Arab National Bank, Bank AlBilad, Riyad Bank, Saudi Investment Bank and Alinma Bank, may look to M&A as a means to strengthen themselves. Last year, Prince Alwaleed bin Talal bought a 16.2 percent stake in Banque Saudi Fransi from Credit Agricole SA through his investment firm, Kingdom Holding.

The Reference Shelf

  • QuickTake explainers on Mohammed bin Salman, the brash young leader behind the Saudi shakeup, and the planned partial privatization of Saudi Aramco.
  • Bloomberg Intelligence analysis on the SABB and Alawwal Bank deal.
  • Which banks are leading the pack in Saudi Arabia and which are still making inroads?
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