Saudi Arabia's biggest lender NCB in merger talks with rival Riyad Bank

The potential deal will be the second tie-up in the kingdom, the biggest banking market in the GCC

National Commercial Bank is the biggest lender by assets in Saudi Arabia. Michael Bou-Nacklie / The National

National Commercial Bank, the biggest lender by assets in Saudi Arabia, is in preliminary talks to merge with rival Riyad Bank, a move that could create a financial institution worth $182 billion (Dh668bn) in assets.

The talks are at an initial stage and may not result in a merger, NCB said in a statement to the Saudi Stock Exchange, where its shares are traded. Riyad Bank, which is also listed on the bourse, confirmed discussions in a separate statement.

“If the merger is agreed upon, this shall be subject to the terms and approvals of the relevant regulatory authorities in the kingdom of Saudi Arabia and the approval of the extraordinary general assembly of both banks,” both lenders said.

The two financial institutions have sought consultations on the merger from the kingdom’s financial regulator Saudi Arabian Monetary Authority prior to discussions. Both banks do not expect “forced dismissal” of employees if the deal is finalised and approved by the regulator, they said, adding that shareholders will be informed regarding further developments.

The Public Investment Fund, Saudi Arabia’s sovereign wealth fund, owns about 44 per cent of NCB and 22 per cent of Riyad Bank, according to Bloomberg data. An agreement could create the third-biggest lender by assets in the GCC.

The potential deal would be the second merger of Saudi Arabian banks, the biggest banking market in the Arabian Gulf, and is the latest in the string of consolidations happening across the six-member economic bloc of GCC.

The boards of Saudi British Bank (Sabb) and Alawwal Bank, subsidiaries of the HSBC and Royal Bank of Scotland, respectively, had started merger talks in May. The tie-up was formally approved in October and will create a financial entity worth $73bn in combined assets. The transaction is still subject to shareholder and regulatory approval.

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Banks in the Gulf states have struggled to maintain profitability and credit growth as economies slowed on the back of three-year oil price slump that began in the middle of 2014. Oil prices, which slumped to below $30 a barrel in the first quarter of 2016 have since recovered to hover around $60 a barrel mark. Financial institutions are increasingly looking to consolidate their balance sheets in a bid to gain scale and cope in tougher operating conditions.

Regional banks are set to see stronger performance going forward as macroeconomic conditions improve and demand for credit grows, according to analysts and reports by rating agencies Moody’s Investors Service and S&P Global Ratings.

Elsewhere in the Gulf, consolidation activity is also heating up.

Abu Dhabi Commercial Bank, the second-largest lender in the UAE's capital, in September said it was exploring the possibility of a merger with Union National Bank and Sharia-compliant lender Al Hilal Bank, which could create a banking entity worth about $114bn in assets.

The latest consolidation move in the UAE, the second biggest Arab economy, follows the successful merger of National Bank of Abu Dhabi and First Gulf Bank to create First Abu Dhabi Bank, a $188bn banking powerhouse.

The National Bank of Bahrain is also in talks to buy Islamic Development Bank’s 14.4 per cent stake in the Sharia-compliant Bahrain Islamic Bank. This comes after merger talks between Omani lenders Bank Dhofar and National Bank of Oman to create a lender worth $20bn in combined assets. Muscat-listed Alizz Islamic Bank and Oman Arab Bank, a subsidiary of Omani conglomerate Ominvest, have also agreed to merge their balance sheets.