The coronavirus pandemic-induced weakness in the global economy, coupled with a low oil prices, are pushing the banking sector into consolidation efforts.
National Commercial Bank (NCB), Saudi Arabia’s biggest lender, said on Thursday it had signed an initial agreement with smaller lender Samba Financial Group to create a combined entity with almost $214 billion in assets, Reuters said, referencing a statement on the Saudi stock exchange, Tadawul.
NCB’s offer would value each Samba share at 27.42 to 29.32 riyals ($7.82), giving it a maximum market value of $15.63 billion, 27.5% above its market value of nearly $12.3 billion based on Wednesday’s closing price, Reuters explained.
NCB has a market value of nearly $30 billion, more than double that of Samba, Reuters noted. JPMorgan is advising NCB, while two sources told Reuters Morgan Stanley is advising Samba.
According to Reuters, Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF) is a major investor in both banks, with a stake of 44.29% in NCB and 22.91% in Samba. The Public Pension Agency and the General Organisation for Social Insurance are also substantial shareholders in both banks.
Previously, merger talks had broken down between NCB and another Saudi bank, Riyad Bank.
“We believe Samba is a more strategic fit than Riyad Bank and could present good cost synergies. In the current scenario of the possibility of high non-performing loans (NPA), the combined entity will have one of the lowest loan to deposit ratio (LDR) and highest investment book,” said Mazen al-Sudairi, head of report at Al Rajhi Capital.
One advantage of the merger is that both banks have low loan-to-deposit ratios compared with their peers, said Alsudairi, as reported by Arab News.
“Samba has a low loan-to-deposit — below the 80 percent average of banks, while NCB has 70 percent of free deposits — above the 40 percent average of banks. This merger if completed will create a new banking entity that has both high free-deposits and a low loan-to-deposit, that will help it to grow in the future.” He said that the enlarged bank would hold almost a quarter of the loans in the entire Saudi banking system.