LONDON: Saudi British Bank (SABB) and Alawwal Bank have agreed to merge, in a move that would create the Kingdom’s third-biggest lender with assets of around $77 billion, the institutions announced on Wednesday.
The agreement will see SABB — 40 percent owned by the UK’s HSBC — acquire Alawwal, which is 40 percent owned by Royal Bank of Scotland — for 18.6 billion riyals ($4.96 billion).
The banks made the announcement on the Saudi stock exchange Tadawul on Wednesday.
The merger, initially flagged as a possibility by the banks in April, is the first major deal of its kind in the Kingdom’s for around 20 years. It will create a lender only exceeded in size in the country by National Commercial Bank and Al-Rajhi.
The banks’ boards have reached a non-binding agreement on the share exchange ratio, subject to several conditions, the institutions said in separate filings.
“A binding agreement is yet to be entered into between Alawwal Bank and SABB,” the two banks said. “Any binding agreement to proceed with the merger will be subject to a number of conditions, including SAMA [central bank], other regulatory authorities, and the shareholders’ approval.”
Based on the preliminary agreement, Alawwal shareholders would receive 0.485 SABB shares for each Alawwal share, it was announced.
Based on the exchange ratio and the closing price of 33.5 riyals ($8.93) per SABB share on Monday, the last trading day before the announcement, the merger would value each Alawwal share at 16.3 riyals and Alawwal’s existing issued ordinary share capital at approximately 18.6 billion riyals, the statement said. This represents a premium of 28.5 percent to the Alawwal share price, the banks said.
The combined entity is valued at a price-to-book ratio of 1.4, according to calculations by Saudi Fransi Capital, which added that the deal significantly strengthens HSBC’s presence in the Kingdom.
“It is already a premium player in investment banking, and this will only reinforce its credibility for government and premium corporates,” the bank said in a research note, indicating it was likely to attract “a lot of lucrative mandates” linked to the country’s economic transformation in the coming five to 10 years.
Alawwal shares surged 10 percent on the announcement, while SABB retreated 4.5 percent, as part of a wider sell-off on the Tadawul.
Progress on the merger had taken longer than expected, partly because the regulatory environment for bank acquisitions in Saudi Arabia is relatively untested. Shareholders were also assessing any potential impact from the Kingdom’s anti-corruption drive, two sources told Reuters in January.
The steps still to be agreed include completion of confirmatory due diligence, finalization of the merger deal and agreement on a number of other commercial issues, the banks said.
The merger follows similar tie-ups in recent years by banks in Abu Dhabi, Qatar and Bahrain, as part of national economic consolidation programs coming in the wake of lower oil prices.
FGB and NBAD of Abu Dhabi completed a merger last year to form First Abu Dhabi Bank (FAB), the UAE’s largest by assets.
The SABB-Alawwal deal, by contrast, is primarily motivated by the desire by RBS to exit the Saudi market, according to Aqib Mehboob, a senior analyst with Saudi Fransi Capital.
“This merger appears to be driven more by facilitating an exit for RBS from KSA due to capital requirements for RBS, as generally European banks are pulling back from emerging markets due to new regulatory requirements,” he told Arab News.
“We believe that the regulator (SAMA) feels that the market can support more financial services providers, particularly as Vision 2030 is implemented. Therefore, we do not believe that SAMA is pushing for further consolidation among domestic banks.”
In March rating agency Moody’s Investor Service said that it expected Saudi Arabia’s banks to outperform regional peers in 2018, thanks to improvements in the Kingdom’s economy and higher interest rates.
Moody’s predicted that commission and fee income at the country’s bank will grow 5 percent this year, with a rise in government prompting a recovery in trade and foreign exchange transactions.