Saudi Arabia’s Riyad Bank has begun preliminary discussions about a potential merger with National Commercial Bank (NCB), the kingdom’s biggest lender by assets, the two banks said in statements to the exchange on Monday.

“If the merger goes ahead, the banks will have a combined market share of 30% of assets. The combined bank will gain scale in both (the) corporate segment, where NCB is already the largest, and retail, where NCB is second-largest and Riyad is third-largest,” Shabbir Malik, banking analyst at EFG-Hermes told Zawya by email.

Data from Eikon shows that NCB and Riyad Bank are the biggest and fourth-biggest banks in the Saudi index by market capitalisation, with NCB having a market capitalisation of over 143 billion Saudi riyals ($38.1 billion), and Riyad Bank's market cap being 58.6 billion riyals. In between are Al Rajhi Banking & Investment Corporation and Samba Financial Group, with market caps of 137.4 billion riyals and 60.1 billion riyals respectively.

“There is scope for synergies mainly from cost optimisation, however the key challenge will be headcount reduction of the two banks’ primarily Saudi staff. Most of the cost savings will have to be achieved through optimising non-personnel costs,” Malik added.

Shares in Riyad Bank surged 8.2 percent on Tuesday, in reaction to the announcement, while NCB added 1.5 percent. On Wednesday, shares in Riyad Bank gained 0.10 percent, while shares in NCB dropped 1.36 percent and Saudi Arabia’s stock market index ended the day mainly flat.

“The effective interest rate will be relatively higher in Riyad (Riyad Bank) than NCB; NCB will benefit more from an increase in interest rates. Riyad’s time deposits are 37 percent compared to 16 percent for NCB, both banks have a healthy time deposits-to-total deposits ratio,” Mazen Alsudairi, head of research at Al Rajhi Capital told Zawya by email.

“With interest rates rising worldwide, investors are looking more at time deposits," Al Sudairi said. In a fast-changing interest rate environment, longer term deposits can be seen as a burden by investors as they are fixed at a rate set when interest rates were lower.

Al Sudairi said the deal would allow for overall growth in the banks' loans business, though. "After the merger, Riyad Bank will be exposed to NCB’s market share and NCB would be exposed to Riyad’s market share,” he said.

“The loan-to-deposit ratio is high at Riyad, it is 91% since oil prices declined in 2015, compared to NCB's 81%. With this level of loan-to-deposits, Riyad is actually matching some of the components SAMA (Saudi Arabian Monetary Authority) is restricting: no lending more than 90% loan-to-deposits," Alsudairi said.

In January 2018, SAMA announced that it had increased the maximum loan-to-deposit ratio for mortgages to 90 percent - up from 85 percent previously.

“This increase in the ratio of loan to the value of the first housing for citizens will contribute to the growth of the residential financing sector and to achieve integration with the national housing goals embodied in the kingdom's Vision 2030, without prejudice to the requirements of banking sector safety or financial stability,” SAMA's statement said.

For 2018, Riyad Bank shares are up 56.32 percent so far, while NCB shares are up 28.07 percent. A Thomson Reuters index of Saudi bank stocks has gained 12.17 percent since the start of the year.

In October this year, two other large Saudi banks, Saudi British Bank and Alawwal, said they had entered into a “binding merger agreement”. “It is expected that the merger will complete during the first half of 2019,” the banks said in a statement. (Read more)

Elsewhere in the region, Dubai’s index was mainly flat on Wednesday, Abu Dhabi’s index rose 0.34 percent higher, Qatar’s index edged 0.11 percent lower, Kuwait’s premier market index dropped 0.30 percent, while Bahrain’s index gained 0.4 percent, Oman’s index rose 0.31 percent and Egypt’s blue-chip index EGX30 was trading 1.34 percent higher.

(Reporting by Gerard Aoun; Editing by Michael Fahy)


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