HSBC, RBS in talks to merge Saudi ventures

Combined entity would be the kingdom’s biggest after National Commercial Bank and Al Rajhi Bank

HSBC Holdings Plc and Royal Bank of Scotland Group Plc’s Saudi Arabia ventures are exploring a potential merger to create the kingdom’s third-largest lender with $78 billion in assets.

Alawwal Bank, which is 40 per cent 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 per cent 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.

‘Ideal environment’

“The current environment is ideal for mergers,” Jaap Meijer, head of equity research at Arqaam Capital Ltd., 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 $1.3 billion, 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.