Year’s Biggest Bank Merger Sealed as Saudi Rivals Reach Deal

(Bloomberg) --

National Commercial Bank, Saudi Arabia’s largest lender by assets, agreed to buy rival Samba Financial Group for $15 billion in the biggest banking takeover this year.

NCB will pay 28.45 riyals ($7.58) for each Samba share, based on Thurday’s close, valuing the smaller lender at about 55.7 billion riyals. The kingdom’s sovereign wealth fund, the biggest single shareholder in the two banks, will have the largest stake in the combined entity with 37.2%.

The new bank will have total assets of more than $220 billion, creating the Gulf region’s third-largest lender. Its $46 billion market capitalization nearly matches that of Qatar National Bank QPSC, which is still the Middle East’s biggest lender with about $268 billion of assets.

NCB shares rose as much as 3.6% on Monday, the most in over three months, before trimming their increase to 1.3% as of 11:56 a.m. in Riyadh. Samba climbed as much as 3.1% to trade at the highest level since February, before paring its gain to 2.2%.

Banks in the oil-rich Gulf have been combining as regional economies suffer the twin shocks of lower energy revenues and the global coronavirus pandemic. The Saudi consolidation also coincides with a long-awaited wave of banking mergers in Europe, where lenders are exploring tie-ups or have begun taking over smaller rivals.

“Under NCB’s management, better value should be realized from Samba’s over-capitalized assets,” CI Capital analysts including Sara Boutros said in a note to clients. “The deal also provides NCB with a larger capacity to grow more aggressively, particularly in the corporate space, as the market stabilizes and as lending opportunities emerge.”

A strong banking sector is a foundation for Crown Prince Mohammed bin Salman’s Vision 2030 plan to diversify the Saudi economy away from oil, an initiative that calls for the private sector to take the lead from the government in boosting growth. Several key elements of his plans, such as boosting entrepreneurship and expanding home lending, hinge on access to financing.

Besides the sovereign fund, known as the Public Investment Fund, the largest shareholders in the combined NCB-Samba entity will include the Saudi Public Pension Agency, which will own 7.4%, and the General Organisation for Social Insurance with a 5.8% stake.

Vision 2030

“Saudi Arabia is undergoing a historic transformation with Vision 2030,” said NCB’s current chairman, Saeed Al-Ghamdi. “Such a transformation requires a robust financial services sector, especially highly capitalized, resilient banks that can fund economic development, as well as support Saudi Arabia’s trade and capital flows with the region and the rest of the world.”

NCB will offer 0.739 new shares for each Samba share, at the lower end of the 0.736-0.787 ratio the banks set when they signed an initial framework agreement in June. The deal is expected to close in the first half of 2021.

The offer is a 3.5% premium to Samba’s Oct. 8 closing price of 27.50 riyals and about 24% higher than the level the shares traded at before the talks were made public. Bloomberg News first reported the merger discussions.

More details:

• NCB’s existing shareholders will own 67.4% and Samba’s shareholders will own 32.6% of the combined entity
• The transaction is expected to unlock about 800 million riyals annually fully phased in cost synergies after integration
• Ammar AlKhudairy, current chairman of Samba, to become chairman of merged bank; Saeed Al Ghamdi, the current chairman of NCB, to become managing director and group CEO
• NCB advised by JPMorgan Saudi Arabia; Samba advised by Morgan Stanley Saudi Arabia

The deal comes almost a year after NCB abandoned plans to merge with Riyad Bank, a deal that would have created a bank with about $200 billion of assets. HSBC Holdings Plc’s local affiliate Saudi British Bank completed its acquisition of Alawwal Bank, which was part-owned by Royal Bank of Scotland Group Plc, in June last year.

“Banks across the Gulf have been coming under pressure to consolidate because of weak revenue growth due to low interest rates and slow GDP growth,” said Shabbir Malik, director of banking and financials at EFG-Hermes.

Saudi Arabia has almost 30 local and international lenders serving a population of more than 30 million people. “Banking is increasingly becoming a scale business where bigger banks can commit more resources to digitization while cost of funding can be cheaper,” Malik said. “That gives bigger banks an advantage in Covid-19 era.”

The combined bank’s targeted cost synergy of 9% is below regional peers, leaving room for upside post integration. A better funding structure and an opportunity in cross-selling products should boost revenue by at least 2%, according to Bloomberg Intelligence analyst Edmond Christou.

The new leadership will assume their new roles after the conclusion of the merger in the first half of 2021, subject to approval of the nominations by the new board of directors.

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