The recent announcement of rival bids for the giant ABN-Amro Dutch Banking Group by both Barclays and the Royal Bank of Scotland (RBS) of the UK, set blue-blooded investment bankers pulses racing. What a feast of financial intrigue it was — involving last minute bids, consortiums, hedge funds, divided investor loyalties, and management tugs-of-war. Each rival bidder promised that their strategy for the merger was the best in the long term, and advised how synergies, integration and market positioning would prevail. Is this the way forward for Saudi banking?
RBS offered more than Barclays, but the sticking point was the sale of LaSalle — the US arm of ABN-Amro, which had been “promised” to Bank of America. RBS, along with its consortium partners Fortis and Sartander, had offered $24.5 billion for La Salle — some $3.5 billion more than Bank of America — but, on the condition that ABN-Amro accepted the 72 billion euros offer for the entire ABN-Amro group. This was rejected by ABN-Amro that still hopes that Barclays wins, but the Dutch courts have now put the ball back into the shareholder’s court. It is they who will decide which way the rival bids goes — a rebellion of shareholders could yet see off Bank of America’s bid and thus a win for RBS. However, an extraordinary general meeting has to be scheduled. The final outcome is yet undecided.
The spirit of rival mergers and bids seems to have gripped the Gulf region too, and the outcome of the latest announced deal also seems to be uncertain. Oman took the lead, when the country’s largest bank — Bank Muscat — announced a takeover bid for Oman’s Alliance Housing Bank. Apparently, Bank Muscat has offered 0.375 Omani rials per share to acquire Alliance. Why the merger? Net income at Alliance Housing Bank seems to have recently come under pressure, and declined to around 11 percent in 2006 after the Omani regulators allowed Bank Muscat and other Omani banks to offer mortgages and competition in this sector grew. Synergy seems to be the prime mover for the merger. Just like the ABN-Amro saga though, the Omani merger seems to have faced snags. Alliance is considering another rival takeover bid from a local Omani bank, after seeking a price five times the mortgage lender’s book value, compared with the 2.61 times book value of Muscat Bank’s offer.
Why do banks go on this merger spree? What are the benefits to banks and their consumers to justify such actions? Is it merely a matter of ego power, in terms of World Bank ranking in the final analysis? Is there scope for possible Saudi bank mergers in the face of globalization and post-World Trade Organization entry?
Banks making bids for rivals have to justify their action to shareholders — in the final analysis they are the ones paying the price, either in terms of borrowed money to fund the acquisition, or through a further sale of shares which could dilute dividend yields in the future. Once a friendly or hostile bid is announced, the PR machine goes into overdrive for both the suitor and the courted parties. This is a financial marriage after all, and the best foot has to be put forward for the financial bride and groom. The PR tells us that the benefits are many, resulting in efficient competition, economies of size, expansion of business lines, a lower probability of bank failure of the merged organization due to more diversified portfolios, and finally contented consumers all around.
But what of the cost of mergers? Do they all end blissfully happy-wed ever after? Just like marriages, some end up on the rocks, with more PR to announce “spin-offs” and demergers this time. By then, those that had arranged the original mergers had either quietly retired, or been poached by rival companies, and only bewildered shareholders are left behind. The elimination of banks can lead to higher costs, as those now dominating the industry can indirectly collude to maintain charges at higher levels than previously. Small businesses could suffer, as lending to this sector is often of a lesser priority for mega banks that might opt for “big-ticket” items in line with their increased capitalization and market power. Finally, some of these larger merged banks may enter into new areas and take increased risks and fail, forcing regulators and society to pick up the price from bailouts. It is ironic that, the bigger a financial institution, the more likely it might take risks based on the premise of “too-big-to-fail” syndrome — that regulators will not allow the largest banks to fail, simply because this causes financial panic in the whole system.
In Saudi Arabia, there have been some bank mergers since the establishment of the Saudi banking system. Today the Saudi government is part-owner in Riyad Bank and National Commercial Bank, and both these institutions are solidly performing, with a relatively strong and independent management and internal process and controls. At the same time, some of the smaller banks merged into one entity during the era of Saudization of the foreign bank branches took place in the late 1970’s. This happened with the branches of Bank Melli Iran, Banque du Liban et d’ Outremer, National Bank of Pakistan into the United Saudi Commercial Bank (USCB). The USCB then took over the Saudi-Cairo Bank, and these in turn merged with SAMBA in 1999.
By 1980, Saudization of the major foreign bank branches had been completed, and the Saudi regulatory authorities, and SAMA in particular, have overseen a remarkable transition and transformation of the Saudi banking sector into one of the most regulated, capitalized and profitable sectors of the national economy. Today however, the challenges are different from those in the era of bank Saudization. WTO accession has ensured that foreign banks and other financial players are given equal opportunities to enter the Saudi financial market, and Saudi banks will face competitive pressure from regional and international banks, whether these have a presence in the Kingdom or not, nor whether they operate under their own brand name or through a local joint venture. The list of new foreign entrants in the Kingdom and the region seems endless and varied — Duetche Bank, JPMorgan Chase, BNP Paribas, Emirates Bank, National Bank of Bahrain, GIB, HSBC, EFG Hermes, Swicorp, Morgan Stanley, Credit Suisse, Lehman Brothers, and so on.
Paradoxically, while Saudi bank’s capitalization might be one of the highest in the world, they are undercapitalized domestically when it comes to participating in large-scale loan projects on an individual basis. They now enter such loans through bank syndications. Mergers might be an option, but this might reduce competition and encourage monopolistic pricing for consumers. What might evolve is a search for synergy and complementary services, with mergers for banks that do not offer a full range of products. Islamic financing and mortgage financing is one area which could see some Saudi banks discuss possible strategic alliances and mergers to safeguard themselves from increased foreign competition.
Some foreign banks with excellent financial and management track records, such as the National Bank of Kuwait for example, which wishes to enter the Saudi market, might decide to buy out the share of a foreign joint-venture operator of one of the Saudized banks. It has plans to acquire 30 percent of an unlisted Turkish bank. Such “merger” might add value if it complements the strengths of both sides. Whatever options are considered, the future outlook for Saudi banking is certainly not one of maintaining the current status quo as merger mania has come to the Gulf.
Dr. Mohamed Ramady is a visiting associate professor, Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.