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Saudi Arabian bank ventures start merger talks

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HSBC Holdings Plc and Royal Bank of Scotland Group Plc's Saudi ventures said they're in talks to combine, potentially giving RBS an exit from an asset the state-owned British bank has reportedly sought to sell for years.

[DUBAI] HSBC Holdings Plc and Royal Bank of Scotland Group Plc's Saudi ventures said they're in talks to combine, potentially giving RBS an exit from an asset the state-owned British bank has reportedly sought to sell for years.

The board of Alawwal Bank, which is 40 per cent owned by RBS, agreed to start initial discussions with Saudi British Bank, or SABB, according to a statement on the Riyadh stock exchange's website Tuesday. Both lenders are based in Riyadh, with HSBC owning 40 per cent of SABB.

Any deal would come as firms grapple with how to approach the Middle East's biggest economy, which is embarking on an unprecedented diversification and privatisation plan but still blocks foreign control of local banks.

London-based HSBC's successes in Saudi Arabia include winning a key role advising on the initial public offering of Saudi Arabian Oil Co, potentially the biggest-ever share sale. Citigroup Inc, after a 13-year absence from the market, said Tuesday that it got an investment-banking license from Saudi authorities.

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Other lenders are concerned about the prospect of bad loans hitting the retail and commercial banking system as Saudi authorities impose budget austerity. Lending by Saudi banks to the private sector was expanding rapidly as recently as last year, but has since stalled. In February, annual growth slowed to 0.3 per cent, the lowest figure since 2009.

A merger may not necessarily take place, Alawwal said, adding that it doesn't expect any job losses should a deal be completed. The Saudi Arabian Monetary Authority was approached before talks started, according to the statement.

France's Credit Agricole SA,  which owns 31 per cent of Banque Saudi Fransi, is also considering selling out of the kingdom, people familiar with the matter said last month. According to analysts and people familiar with potential transactions, Middle Eastern groups have been more interested in Saudi banking assets than Western lenders of late.

RBS's stake in Alawwal is worth about US$1.3 billion, according to data compiled by Bloomberg. Alawwal reported a 37 per cent drop in first-quarter profit on April 17, missing analysts' estimates. Its shares are down about 25 per cent this year, more than double the 12 per cent drop by Saudi British stock.

RBS, which has been owned by the British state for almost a decade after a government bailout, has been shrinking and selling assets to focus on its home market amid falling profit margins and tougher capital requirements. It hired Credit Suisse Group AG to advise on a sale of its Alawwal stake, Reuters reported in November. That report said Saudi Arabia's Public Investment Fund was considered a likely buyer.

Both Alawwal and SABB primarily lend to businesses, not consumers, and both banks reported that non-performing loans to the construction and building industry more than tripled in 2016.

Alawwal was known as Saudi Hollandi Bank until last year and the venture was acquired by RBS in its 2007 joint purchase of the Netherlands' ABN Amro, the disastrous deal that helped prompt the UK bailout. The new name means "the first" in Arabic, referring to the bank's 1926 founding as Saudi Arabia's first bank.

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