Saudi lenders may merge to cre­ate king­dom’s third largest

Rally in shares of Saudi Bri­tish Bank and Alawwal Bank

The National - News - Business - - The Region -

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

Si­mon Daw­son / Bloomberg

Alawwal Bank, above, and Saudi Bri­tish Bank have a large com­mon share­holder base, in­clud­ing the Olayan fam­ily.

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