HSBC Holdings and Royal Bank of Scotland Group’s Saudi Arabia ventures are exploring a potential merger to create the kingdom’s third-largest lender with $78bn in assets.
Alawwal Bank, which is 40% owned by RBS, plans to start initial talks with HSBC’s Saudi British Bank, according to a statement on Saudi stock exchange website Tuesday. Both lenders are based in Riyadh, with HSBC owning 40% of SABB.
The negotiations come as banks grapple with how to approach the Middle East’s biggest economy, which is embarking on an unprecedented diversification and privatisation plan but still blocks foreign control of local banks. The combined entity would be the kingdom’s biggest after National Commercial Bank and Al Rajhi Bank, and follows the merger of other regional lenders as they battle with sustained low oil prices, slower economic growth and a decline in asset quality.
“The current environment is ideal for mergers,” Jaap Meijer, head of equity research at Arqaam Capital, said by telephone. “Growth opportunities are limited, and banks need to cut costs to still deliver returns for shareholders.” The combination will also make it easier for RBS to exit Saudi Arabia “as it will hold a smaller stake in a bigger, stronger bank.”
RBS has for years tried unsuccessfully to sell its Alawwal holding, which is worth about $1.3bn, according to data compiled by Bloomberg. Any interest in the stake came from local or regional groups, according to analysts and people familiar with the transactions. Credit Agricole, which is also considering the sale of its 31% stake in Banque Saudi Fransi, has failed to attract big-name global banks, people familiar with the matter said.
A deal would mark Saudi Arabia’s first banking industry merger for almost 20 years and could prompt other deals. Samba Financial Group merged with United Saudi Bank in 1999, creating one of the largest regional financial institutions at the time, of which Citigroup owned 23%, according to Samba’s website. Saudi Arabia is currently home to about 33mn people and 26 banks - 12 local and 14 foreign lenders.
“The history of mergers in the country is checkered as a few have tried and been unsuccessful,” said Muhammad Potrik, head of research at Riyad Bank. If this deal is successful it “could be a precursor to the start of an M&A trend in the banking and other sectors such as petrochemicals, insurance and retail.”
Elsewhere in the Gulf Cooperation Council, National Bank of Abu Dhabi and First Gulf Bank last month completed a merger to create the UAE’s largest bank with assets of $180bn. Qatar’s Masraf Al Rayan, Barwa Bank and International Bank of Qatar announced plans for a three-way merger last year.
Both Alawwal and SABB primarily lend to businesses, not consumers, and both reported that non-performing loans to the construction and building industry more than tripled in 2016. Lending by Saudi banks to the private sector was expanding rapidly as recently as last year, but has since stalled. In February, annual growth slowed to 0.3%, the lowest figure since 2009.
Alawwal and SABB also have large common shareholders, with the billionaire Olayan family holding about 22% in Alawwal and about 17% in SABB, according to data compiled by Bloomberg. State-controlled Public Institution for Social Security holds a 10.5% stake in Alawwal and 9.74% in SABB, according to the data.
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