Alawwal Bank and SABB mull merger to create Saudi’s third biggest bank

Shares in Saudi Arabia’s Alawwal Bank rose 9 per cent in early trading on Wednesday after it agreed to start talks with Saudi British Bank (SABB) about a merger that could create the kingdom’s third biggest bank with assets of nearly $80bn.

Shares in SABB increased 6.8 per cent in early trading after the two lenders announced the merger plans late on Tuesday.

Most other Saudi bank stocks also rose.

Muhammad Faisal Potrik, head of research at Riyad Capital, said the merger could be a precursor to the start of an M&A trend in the banking and other sectors such as petrochemicals, insurance and retail. “We would view completion of this merger as a very positive development,” he said.

The announcement is the latest example of consolidation in the Gulf’s banking sector, where profit margins are being squeezed by lower government and consumer spending because of weak oil prices.

“The consolidation points to the fact that you need stronger banks to sustain in this challenging macro environment. You need large, efficient banks to serve,” said Murad Ansari, an analyst at EFG-Hermes in Saudi Arabia.

British banks are the biggest shareholders in both lenders. Royal Bank of Scotland acquired a 40 per cent stake in Alawwal Bank when it bought ABN AMRO in 2007. RBS has been trying sell the holding for a number of years as it retreats from international operations.

HSBC Holdings owns 40 per cent of Saudi British Bank (SABB), which is the kingdom’s sixth largest bank by assets.

A combination of Alawwal and SABB would rank third in Saudia Arabia with assets of $77.6, behind National Commercial Bank and Al Rajhi Bank, according to Thomson Reuters data.

Reuters reported in November that RBS had hired Credit Suisse to sell its stake in Saudi Hollandi Bank, which was renamed Alawwal Bank in November.

Banking sources said at the time they expected the holding to go to a local rival, partly because of restrictions on a foreign buyer taking the stake.

The banks said on Tuesday that any merger agreement would be subject to a number of conditions, including the approval of the kingdom’s regulatory authorities, and said Saudi’s central bank had been consulted about merger requirements beforehand.

The two lenders have several common shareholders. Saudi’s Olayan family holds 21.76 per cent of Alawwal Bank and 16.98 per cent in SABB while the Saudi government owns 10.5 per cent of Alawwal Bank and 9.74 per cent of SABB, according to Thomson Reuters data.

The two banks said the proposed merger, if completed, would not result in any forced layoffs.

A total of 12 commercial lenders operate in the kingdom’s banking sector, sharing total assets of more than SAR2 trillion ($535bn).

Banking consolidation is also underway elsewhere in the region. Abu Dhabi lenders First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) merged on April 1 to create one of the largest banks in the Middle East and Africa.

In Qatar, Masraf Al Rayan is moving ahead with a three-way merger with Barwa Bank and International Bank of Qatar.