HSBC, RBS's Saudi affiliates strike early merger deal

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RBS should be able to reduce the capital it holds against the stake, hopefully later this year, the source said, freeing up enough funds to add around 40 basis points to RBS's tier one capital, a measure of a bank's financial strength.

Following the Sabb-Alawwal deal, which will create the third largest bank in Saudi Arabia, RBS will now own around five per cent of the newly merged entity - meaning it will only have to hold just under £1bn to cover that risk.

Under the terms, Alawwal shareholders will receive 0.485 Sabb shares, valuing each Alawwal share at 16.3 Saudi riyals, the statement said.

As per this exchange ratio and the closing price of SR33.5 per SABB share on May 14, 2018 (being the last trading day prior to the date of this announcement), the merger would value each Alawwal Bank share at SR16.3 and Alawwal bank's existing issued ordinary share capital at SR18.6 billion.

A merger of two Saudi banks, announced on Wednesday, will free Royal Bank of Scotland of 4.9 billion pounds in assets it has been trying to shed for years and boost its core capital, a source familiar with the matter said. Worldwide lenders are grappling with how to approach the Middle East's biggest economy, which is embarking on an unprecedented diversification and privatisation plan but still blocks foreign control of local banks. "Any binding agreement to proceed with the merger will be subject to a number of conditions, including SAMA [the central bank], other regulatory authorities, and the shareholders' approval".

Progress on the merger had taken longer than expected, partly because the regulatory environment for bank acquisitions in Saudi Arabia is relatively untested.

Following the announcement of the preliminary merger agreement, Alawwal Bank share price rose 10% to SAR 13.92 ($3.7), while SABB's share price fell 4.5% to SAR32 ($ 8.5). Shareholders were also assessing any potential impact from the Kingdom's anti-corruption drive, two sources told Reuters in January.

"A binding agreement is yet to be entered into between Alawwal Bank and SABB", the two banks said.

SABB and Alawwal said they did not expect the merger to result in any involuntary layoffs of staff.

The merger follows similar tie-ups in recent years by banks in Abu Dhabi, Qatar and Bahrain, as part of national economic consolidation programs coming in the wake of lower oil prices.

RBS's interest in the consortium was around 38 percent, leaving it with a stake of around 15 percent in Alawwal, the source said.