HSBC, RBS’s Saudi affiliates strike early merger deal

Potential merger could yield financial entity with $73bn in assets

Saudi British Bank, a unit of HSBC, has seen profits surge. Waseem Obaidi for The National

Subsidiaries of HSBC and Royal Bank of Scotland in Saudi Arabia reached an initial agreement on the terms of a possible merger.

The two banks, Alawwal Bank, which is 40 per cent owned by RBS, and Saudi British Bank (Sabb), said in a statement to the Tadawul stock exchange that merger discussions are in an “advanced” stage and both lenders reached a “preliminary, non-binding agreement” on the share exchange ratio.

Under the terms, Alawwal shareholders will receive 0.485 Sabb shares, valuing each Alawwal share at 16.3 Saudi riyals, the statement said. The potential merger would therefore value Alawwal’s existing issued ordinary share capital at approximately 18.6 billion riyals (Dh18.2bn) – a premium of 28.5 per cent on the bank’s share price as of May 14.

"We believe the key reason for the merger is to open an exit to RBS," EFG Hermes said in a report on Wednesday. "The merger, should it go through, would dilute the shareholdings of HSBC (40 per cent in Sabb) and RBS (40 per cent in Alawwal) in the combined entity. While HSBC is likely to remain the main shareholder, we believe RBS’s shareholding would be diluted to the point it would no longer be classified as a strategic investor, and, thus, RBS would be able to sell its stake."

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Sabb said it “does not expect that the proposed merger will, if completed, result in any involuntary lay-off of employees.”

"The main source of synergies will be in the form of cost synergies through the closure of overlapping branches, optimisation of IT systems and certain general and admin costs...based on our rough estimates, the capitalised amount of synergies would be equal to 5bn riyals, which represents 8 per cent of the combined entity's market cap," EFG Hermes said in its report.

The deal is subject to regulatory approvals but, if it proceeds, would mark Saudi Arabia’s first bank merger for almost 20 years, creating an entity with about $73bn in assets, according to Bloomberg.

Developing the kingdom’s banking and financial sector is a key objective of Saudi Arabia’s Vision 2030, economic diversification programme, the statement said.