Saudi banking mega merger reflects Kingdom’s reform agenda

Olaya District Street with Modern Buildings In Riyadh, Saudi Arabia. (Shutterstock)
Updated 05 October 2018
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Saudi banking mega merger reflects Kingdom’s reform agenda

  • Prominent Saudi businesswoman Lubna Al-Olayan will become the first woman to chair a publicly traded company in the Kingdom
  • Both the merger and the appointment of Al-Olayan are significant in the context of Saudi Vision 2030

LONDON: Saudi British Bank (SABB) and Alawwal bank have agreed to merge to create the third biggest lender in the Kingdom in the latest move toward banking industry consolidation.
Prominent Saudi businesswoman Lubna Al-Olayan will become the first woman to chair a publicly traded company in the Kingdom when she is appointed to the role at the enlarged lender that will have SR268 billion ($71 billion) in assets.
Both the merger and the appointment of Al-Olayan are significant in the context of Saudi Vision 2030, the country’s social and economic reform blueprint that has a major focus on developing the financial services sector as well boosting the representation of women on boards.
The proposed merger, which is still subject to shareholder and regulatory approval, coincides with a number of financial sector reforms in Saudi Arabia.
“Our bank will supply entrepreneurs with the financial tools needed to grow and create jobs and we will have enhanced capacity to underwrite large-scale transactions to support infrastructure and privatization projects,” said SABB Chairman Khaled Olayan.
No involuntary staff redundancies are expected as a result of the merger, the pair said in a statement on Thursday. Neither will there be any immediate change for customers as both banks will remain independent until the merger has completed.
Banks throughout the Gulf are mulling merger deals as the industry reacts to both changing economic realities and the advance of digital banking that is replacing many of the roles that previously required staff.
“When banks merge the key savings are on employee costs given the service oriented nature of this sector,” Mazen Alsudairi head of research at Al Rajhi Bank, told Arab News.
“So, as per the merger announcement and our calculations, around SR450 million to SR650 million are the savings expected in the future for the combined entity.”
Alawwal shares closed almost 3 percent higher on Thursday following the announcement while SABB closed about 1.1 percent lower.
SABB shareholders will own about 73 percent of the enlarged lender with Alawwal shareholders holding 27 percent.
SABB Managing Director David Dew will be the managing director of the combined entity.
The proposed merger comes as the Saudi banking sector emerges from four tough years as a low oil price, reduced government spending and payment delays took their toll on the banking sector, encouraging lenders to look at how they could cut costs.
“Given the current economic scenario, we don’t see any meaningful improvement in asset quality compared to the last quarter and thus expect provisions to be in the similar range as seen in the first couple of quarters,” Al Rajhi said in its sector report released last month.
The appointment of Al-Olayan to chair the enlarged bank follows other high profile moves by women to senior roles in the country’s financial services sector, including Sarah Al-Suhaimi who heads the Tadawul stock exchange.


Record budget spurs Saudi economy

The budget sets out to lift spending and cut the deficit. (Shutterstock)
Updated 19 December 2018
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Record budget spurs Saudi economy

  • “It is a growth-supportive budget with both capital and current expenditure set to rise.”
  • Government spending is projected to rise to SR 1.106 trillion

RIYADH: Saudi Arabia on Tuesday announced its biggest-ever budget — with spending set to increase by around 7 percent — in a move aimed at boosting the economy, while also reducing the deficit. 

However, analysts cautioned that the 2019 budget is based on oil prices far higher than today — which could prove an obstacle in hitting targets. 

Government spending is projected to rise to SR 1.106 trillion ($295 billion) next year, up from an actual SR 1.030 trillion this year, Minister of Finance Mohammed Al-Jadaan said at a briefing in Riyadh. 

The budget estimates a 9 percent annual increase in revenues to SR 975 billion. The budget deficit is forecast at SR 131 billion for next year, a 4.2 percent decline on 2018.

“We believe that the 2019 fiscal budget will focus on supporting economic activity — investment and wider,” Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB), told Arab News.

“It is a growth-supportive budget with both capital and current expenditure set to rise.”

A royal decree by Saudi Arabia’s King Salman, also announced on Tuesday, ordered the continuation of allowances covering the cost of living for civil sector employees for the new fiscal year.

“The continuation of the handout package will be positive for household consumption by nationals,” said Malik. “We expect to see some overall fiscal loosening in 2019, which should support a further gradual pickup in real non-oil GDP growth.”

World oil prices on Tuesday tumbled to their lowest levels in more than a year amid concerns over demand. Brent crude contracts fell to as low as $57.20 during morning trading.

Malik cautioned that the oil-price assumptions in the Saudi budget looked “optimistic.”

“We see the fiscal deficit widening in 2019, with the higher spending and forecast fall in oil revenue,” she told Arab News.

Jason Tuvey, an economist at London-based Capital Economics, agreed that the oil forecast was optimistic, but said this should not pose problems for government finances.

“The government seems to be expecting oil prices to average $80 (per barrel) next year,” he said. 

“In contrast, we think that oil prices will stay low and possibly fall a little further to $55 … On that basis, the budget deficit is likely to be closer to 10 percent of GDP. That won’t cause too many problems given the government’s strong balance sheet. 

“Overall, then, we think that there will be some fiscal loosening in the first half of next year, but if oil prices stay low as we expect, the authorities will probably shift tack and return to austerity from the mid-2019, which will weigh on growth in the non-oil sector,” Tuvey said.

John Sfakianakis, chief economist at the Gulf Research Center, based in Saudi Arabia, said that the targets of the budget were “achievable” and the forecast oil price reasonable. 

“It is an expansionary budget that should spurt private sector activity and growth,” he said. 

“With Brent crude averaging around $68 per barrel for 2018 and $66 per barrel for 2019, the authorities have applied a conservative revenue scenario.”