Alawwal merger to boost SABB’s corporate, retail lending

Saudi British Bank’s (SABB) merger with Alawwal Bank will increase its lending in the corporate and retail segments, ensuring the new entity is well-placed to capitalize on the Kingdom’s economic reforms, an analyst told Argaam.

“SABB has been geared on its repositioning for Vision 2030. They want to be exposed to sectors that will benefit from the stimulus plan and Vision 2030,” said Edmond Christou, Middle East Analyst for Bloomberg Intelligence.

These sectors include cyclical industries like construction and manufacturing, which Alawwal Bank already has a strong presence in via its corporate segment.

As a result, the merger will diversify SABB’s loan book, but at the cost of higher non-performing loans (NPLs) and bad-debt charges, according to Bloomberg Intelligence.

Among the six largest corporate banks, SABB will be number one in lending to the building and construction sector after the merger, from fifth rank previously. It will rise to second rank in manufacturing from number six pre-merger.

The integration will also help SABB increase its presence in retail banking, Christou said, noting that Alawwal has a strong digital platform – a key advantage in the small and medium enterprises (SME) segment. “This is something that SABB will definitely leverage on, in terms of retail.” 

Talks on the proposed merger between Alawwal Bank and SABB are at an advanced stage, and a preliminary share exchange ratio has been agreed, the lenders said last week.

Based on the preliminary agreement, Alawwal Bank shareholders would receive 0.485 SABB shares for each Alawwal Bank share.

British banks own stakes in both lenders: HSBC Holdings has a 40 percent stake in SABB, while Royal Bank of Scotland owns 40 percent of Alawwal via its acquisition of ABN AMRO.

The merger process is expected to take around one year, Alawwal chairman Mubarak Al-Khafrah told Argaam this week.

Commenting on the merger’s impact on the Saudi banking sector, Christou said the move would be “very important for the industry.”

“We have seen something similar with the regulator pushing for insurance industry to merge for consolidation. This is important because they need to have stable, well-capitalized banks in the industry [that] are able to serve the needs of Vision 2030 and to sustain their capital levels, be solvent,” he noted.

Meanwhile, as more international banks and financial institutions seek licenses to enter the Saudi market, the merger will likely make it harder for foreign players to gain market share, particularly given that SABB and Alawwal both have access to a global network.

“SABB uses HSBC’s global network for clients who would like to invest and do business in the Kingdom. This is a competitive advantage, and they've been charging a higher premium on corporate lending compared to the local banks, so they are already well-positioned in the market, and they use their international network to do business,” Christou said.

The merger with Alawwal will increase market share, making the new entity more competitive in consumer and commercial lending.

“The numbers show they will be the largest commercial corporate-focused bank in the Kingdom. This will make it definitely more challenging for new foreign banks to enter the market, to be competitive, and it will [put] pressure on margins eventually, on corporate margins, particularly,” Christou noted.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com