Here are 5 key benefits of the SABB-Alawwal merger

Saudi British Bank (SABB) and Alawwal Bank this month agreed on a merger, in a deal that would create the Kingdom’s third-largest bank in terms of total assets.

According to a recent Moody’s report, the new entity would have approximately SAR 271 billion ($72 billion) in total assets and a market share of 12-13 percent in terms of assets, loans and deposits as of March 2018.

“We believe the entity would benefit from a very high probability of government support in case of need given its systemic importance, complexity and financial interconnectedness,” Moody’s said.

Argaam has compiled a list of the key benefits to both banks that can be realized by proceeding with the merger.

1) Greater exposure to Vision 2030 sectors

According to a recent report by Bloomberg Intelligence, the proposed merger will help SABB gain significant market share in key economic sectors highlighted under the Vision 2030. 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.

SABB will also increase its rank among the peer group in commerce to No. 2 vs. No. 3; in transportation to No. 3 vs. No. 4; and in consumer finance to No. 3 vs. No. 5.

2) SABB to become largest domestic corporate lender

SABB is set to become the Kingdom’s largest domestic corporate bank following the integration, with a market share of more than 15 percent in corporate loans, according to Moody’s.

The corporate landscape for Saudi banks is competitive with smaller banks aggressively gaining market share. According to Bloomberg Intelligence, SABB maintained its market share during 2017, while Alawwal lost share to Alinma Bank, Bank Albilad and Al Rajhi. SABB is likely to refocus Alawwal's corporate banking strategy in-line with Vision 2030.

3) Advance retail presence

The merger will also help boost SABB’s retail presence. While increasing consumer finance is part of the bank’s plan to diversify its portfolio, it has failed to expand its retail book, with loans falling notably since Q3 2016. Alawwal, on the other hand, was able to expand its retail book up to Q2 2017; the decline since then was reflective of the broader market, according to Bloomberg Intelligence.

Moreover, both lenders are top mortgage providers in the Kingdom and are looking to expand books in-line with the Vision 2030 goal to boost home-ownership. The Saudi housing ministry seeks to expand the mortgage market by over 70 percent to reach SAR 502 billion by 2020, largely via banks.

SABB also stands to benefit from improved digital offerings, given that Alawwal boasts of strong online and mobile-banking platforms.

4) Greater lending to SME segment

SABB will gain a competitive edge in lending to small and medium enterprises (SMEs) post-merger. Alawwal is an innovator in SME lending, with a platform that not only offers financing to business owners, but also builds their franchise. Compared to SABB, it has a greater share of SMEs in overall loans.

5) Drive greater efficiency, branch network

The merger between the two Tadawul-listed lenders can also result in more cost savings and a wider branch network. Alawwal, which has a higher cost-to-income ratio than SABB, saw expenses increase significantly in 201. This was driven largely by rebranding, digitalization and increases in rental expenses due to the branch-network expansion strategy.

Network-wise, Alawwal increased its branches to 67 in 2017 versus 55 in 2014. In contrast, SABB kept its network almost unchanged. SABB's network will be larger post-merger with a total of 144 branches, ranking it fourth after Riyad Bank (340), NCB (400) and Al Rajhi (599). SABB will then be able to leverage its position to increase its customer-deposit base.

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