Saudi Arabia’s biggest lender, National Commercial Bank, has ended merger talks with Riyad Bank for a deal worth $200 billion. According to a statement given to the Saudi stock market, the boards agreed to halt the talks, but did not say why. Talks between both lenders began a year ago, at a time when the regional banking market has been undergoing a major consolidation phase.
According to a report by Castlereagh Associates, as many as 20 banks in the region have been negotiating mergers and acquisitions with an estimated $1 trillion worth of assets in an effort to stay competitive in the context of lower oil prices. Earlier, Abu Dhabi completed the merger of three of its banks to create the region’s fifth-biggest lender, while Saudi British Bank and Alawwal also joined.
“The UAE leads the pack with highest number of mergers both in terms of value and volume. Currently, six mergers and acquisitions are being negotiated or underway in the UAE banking worth sector worth $625.25 billion followed by two M&As in Saudi Arabia worth $256 billion and one each in Kuwait and Oman,” the report said.
“M&A activity in Saudi Arabia is set to rise as a result of higher oil production and the strengthening of the country’s non-oil sector. Last year, 12 M&A deals were made in Saudi Arabia,” it added. “One of those deals was the merger between HSBC’s subsidiary SABB and Royal Bank of Scotland’s subsidiary Alawwal. This deal was the first banking merger in the Kingdom for the last 20 years and promises to become the third biggest lender of the country. With HSBC, the Olayan Saudi Investment Company, Natwest Markets, Banco Santander and GOSI as shareholders, the new bank is to aim for a privileged marketplace in offering personal savings schemes, home ownership solutions and wealth management,” the Castlereagh report pointed out.
Global ratings agency Moody’s Investors Service said that the recent merger and acquisition drive among GCC banks, fuelled by slow growth and subdued credit demand in the region, will help ease overcapacity and boost profitability.
In a situation where many of the GCC banks serve small populations, follow aggressive pricing policies and drive stiff competition, consolidation is expected to stem rising funding costs and improve profitability in the long run. “Despite integration challenges in the early stages, merged banks will gain market share, have better pricing power and cost synergies,” the Moody’s report said.
In the past, when oil prices were high, GCC banks were pampered by significant government deposits. Now, with lesser revenues and mounting debts, states have become more unwilling to support their financial markets as much as they did before. This has made companies in the Gulf resort to mergers as a way to stay resilient.
“In fact, Gulf firms are becoming more mature and cost conscious. Instead of expecting abnormal gains, they are looking to sustain moderate growth by cutting on costs. Through mergers, they are allowed to do exactly this. By cutting redundancy, inefficient competition and increasing efficiency in operations through synergies, merging companies are able to create value not only for their investors and customers, but also for their employees and surrounding communities (as long as mergers do not lead to significant lay-offs),” the Castlereagh report said.