Consolidation of the Saudi financial sector in the post-coronavirus era
The financial sector in Saudi Arabia has four segments — banks, insurance companies, finance companies, and authorized persons (APs). The Saudi Arabian Monetary Authority (SAMA) supervises the functioning of the first three segments and the Capital Market Authority (CMA) supervises the fourth.
For many years, I have been lobbying for the consolidation of the financial sector, especially the insurance segment. The timing of the consolidation is even more imperative now as a result of the economic pressures caused by the coronavirus disease (COVID-19) pandemic.
As for the banking sector, it is a fact that Saudi banks have felt the heat from some rating agencies, although S&P reported that Saudi banks have shown the most resilience in the region. Furthermore, with SAMA injecting billions of riyals into the system, the banking sector managed to mitigate the impact of the pandemic.
The banking segment has been active in implementing consolidations. After the successful conclusion of the SABB and Alawwal merger, NCB and SAMBA are currently under merger discussions, which may create the largest financial institution in the region. Reports are circulating the market that many other banks are planning to join the wave of consolidations especially those which operate fully under Shariah-compliant guidelines.
In the insurance sector, for the past several years, the Saudi central bank has been urging and encouraging companies to strengthen their financial solvency and seek consolidation via mergers or acquisitions. With the proposed new capital requirement to be imposed at a future date, insurance companies with capital below SR500 million ($133 million) will find themselves forced to increase their capital through a rights issue, to consolidate with other companies, or to phase out of the market completely. To date, Walaa and MetLife have successfully completed their merger and are working on the integration process. Other companies have made official disclosures that they have entered into consolidation discussions, including Aljazira Takaful with Solidarity and Gulf Union, for the second time, with Al Ahlia. Others may make announcements soon.
As for APs, one consolidation has already taken place between Bakheet and Assol companies. Although the CMA has a policy of licensing any qualified AP who applies for a license, locally or internationally, they also like to see consolidation among APs. Again, post-COVID-19, the need for consolidation among APs is becoming crucial for survival.
In my opinion, the consolidation wave in the Saudi financial sector will continue to create a healthier and stronger financial ecosystem in the Kingdom. The insurance segment is the urgent priority. For those companies with a low capital base that face challenges with solvency ratios, accumulated losses, and book value deterioration, I strongly advise their board members and CEOs to seriously consider the consolidation option as a strategic corporate action. For someone who has been involved for years in advising the insurance market in the Kingdom, this strategic option is critical.
Basil M.K. Al-Ghalayini is the chairman and CEO of BMG Financial Group.