Saudi lenders may merge to create kingdom’s third largest
Rally in shares of Saudi British Bank and Alawwal Bank
Shares in Saudi British Bank and Alawwal Bank rose yesterday after they agreed to explore a potential merger to create the kingdom’s third-largest lender with US$78 billion in assets.
Alawwal Bank, which is 40 per cent owned by RBS, plans to start initial talks with HSBC’s Sabb, according to a statement on the Saudi stock exchange website on Tuesday. Both lenders are based in Riyadh, with HSBC owning 40 per cent of Sabb. The negotiations come amid an unprecedented diversification and privatisation push in the kingdom. The combined entity would be the country’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,” said Jaap Meijer, the head of equity research at Arqaam Capital. “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”, he said. Shares in Sabb climbed 3.9 per cent on the Saudi stock exchange in Riyadh, while Alawwal jumped 8.6 per cent yesterday.
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 per cent, according to Samba’s website. Saudi Arabia is home to about 33 million people and 26 banks – 12 local and 14 foreign lenders.
“The history of mergers in the country is chequered as a few have tried and been unsuccessful,” said Muhammad Potrik, the head of research at Riyad Bank. If this deal is successful it “could be a precursor to the start of a M&A trend in the banking and other sectors such as petrochemicals, insurance and retail”.
Elsewhere in the GCC, National Bank of Abu Dhabi and FGB 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 threeway merger last year.
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 per cent, the lowest figure since 2009.
Alawwal and Sabb0 also have large common shareholders, with the Olayan family holding about 22 per cent in Alawwal and about 17 per cent in Sabb, according to data compiled by Bloomberg. State-controlled Public Institution for Social Security holds a 10.5 per cent stake in Alawwal and 9.74 per cent in Sabb, according to the data.
Some global banks are investing in Saudi Arabia in preparation for an expected fee bonanza. As part of efforts to repair state finances damaged by a slump in oil prices, the kingdom plans to create the world’s largest sovereign fund and sell hundreds of state assets, including Saudi Aramco. The IPO could value the company at $2 trillion and generate millions of dollars in fees.
Citigroup on Tuesday said it received an investment banking licence from the kingdom’s regulator after 13 years. The New York-based lender lost its licence when it sold its stake in Samba Financial Group in 2004.
Alawwal Bank is 40 per cent owned by RBS, while HSBC owns 40 per cent of Sabb
Alawwal Bank, above, and Saudi British Bank have a large common shareholder base, including the Olayan family.