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Impact of potential merger between 1st and 4th largest Saudi banks

According to Bloomberg, the proposed merger of National Commercial Bank (NCB) and Riyad Bank (RB) would create an institution with $182 billion in assets.

The Public Investment Fund (PIF), Saudi Arabia’s main sovereign wealth fund, owns about 44% of NCB and 22% of RB, according to data compiled by Bloomberg.

“The giant lender could gain an edge against local and foreign rivals in an economy that continues to suffer from tight liquidity following the plunge in oil prices in 2014,” said the news wire.

“Slower economic growth, driven mainly by the drop in oil prices, and a decline in asset quality are prompting policy makers and some banks in the world’s biggest crude exporter to explore merger opportunities. More than 10 banks elsewhere in other Gulf Cooperation Council countries are also considering tie-ups.”

Financing the Saudi debt

Syndicated loans in Saudi Arabia are dominated by foreign institutions, including Japanese banks and global firms like Citigroup Inc., HSBC Holdings Plc and Standard Chartered Plc.

“The government plans to lean on local lenders to borrow $32 billion next year to bridge its budget deficit, and the larger ones are poised to reap a greater slice of both public and private debt,” according to Bloomberg.

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Could the merged banks provide them with enough size advantage to attract state-backing and win it business from the government which dominates the kingdom’s economy?

“The new bank will control about 30 percent of the Saudi loan market, a lead that could increase pressure on smaller Saudi banks to consolidate. Other lenders are already considering mergers. HSBC’s Saudi unit plans to buy Alawwal Bank, which is backed by Royal Bank of Scotland Group Plc, in a $5 billion deal,” said Bloomberg.

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Analysts told Reuters RB could benefit from NCB’s strong balance sheet given it has a high loan-to-deposit ratio, while NCB could use Riyad’s expertise in growing its long-term deposits.

Positive stock movement

According to Nasdaq, quoting Reuters report, Saudi RB’s shares surged 5%, its biggest intra-day gain since June 5, after it announced merger talks with NCB.

“Shares of NCB, the kingdom’s biggest lender by assets, were flat after opening weaker, while shares of smaller lenders such as Al Jazira Bankand Bank Albilad were down in early trade,” said Nasdaq.

“The move comes two months after Saudi British Bank (SABB) and smaller rival Alawwal Bank agreed to a binding deal to create Saudi Arabia’s third-biggest lender in the first major tie-up for the country’s banking sector in recent times.”

Saudi Arabia has only 12 commercial lenders, which will be reduced to 11 after the completion of merger between SABB and Alawwal.

There are fewer than 30 local and international lenders in Saudi, serving more than 30 million people.

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Islamic bank settlement

Major banks in Saudi Arabia reached settlements worth a combined 16.7 billion riyals ($4.5 billion) with the kingdom’s tax authority over a religious levy, said Bloomberg.

The tax authority had extended the 2.5% religious levy, known as the Zakat, by including items that were previously exempt, while eliminating some deductions.