HSBC Holdings Plc is set to reaffirm its position in Saudi Arabia with the takeover of Royal Bank of Scotland Group Plc’s local venture as lenders bet on the kingdom’s ambitious plans to transform its economy.
In the country’s first bank merger in almost 20 years, HSBC affiliate Saudi British Bank offered to take over RBS-backed Alawwal Bank in a $5 billion stock deal. The deal would make SABB the country’s third-biggest lender.
“For HSBC, this is in line with their broader strategy – the opportunities in Saudi Arabia are humongous and they’re not the only ones to realize that,” said Aarthi Chandrasekaran, vice president at Shuaa Capital. “They want to capitalize on their first mover advantage from the international space.”
International banks are looking at 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 lenders. While some European banks such as RBS and Credit Agricole SA are selling stakes, others are doubling down on efforts to position themselves for a boom in advisory work, as well as corporate and consumer lending.
HSBC is already one of the most active international banks in the kingdom through its local investment banking unit — HSBC Saudi Arabia Ltd., in which the London-based lender owns a 49 percent stake. The bank is advising state-oil company Saudi Aramco on what could be the largest ever share sale, and has been the country’s top adviser for share sales since 2010, according to data compiled by Bloomberg. HSBC owns 40 percent of SABB.
“This would increase HSBC’s exposure to the Saudi market, which should reflect positively on its pipeline in the kingdom, particularly when it comes to government projects,” said Monsef Morsy, head of financial analysis at CI Capital in Cairo. “HSBC has been working closely with the government recently so it makes sense for them to increase their exposure through the merger amid the kingdom’s plan to further open up to foreign investors and projects.”
Former HSBC bankers also occupy several senior government posts. Minister of Economy and Planning Mohammad Al Tuwaijri was previously chief executive officer of HSBC in the Middle East and North Africa until 2016. Fahad Al Saif, head of the debt management office which is responsible for sovereign bond sales, was deputy managing director at SABB, and previously worked at HSBC Saudi Arabia.
Alawwal shares surged 10 percent, the maximum daily limit, at the open in Riyadh trading, while SABB shares were trading 4.8 percent lower. SABB offered to pay a 29 percent premium on Alawwal’s closing price.
RBS has for years been trying unsuccessfully to sell its stake in Alawwal. The Edinburgh-based firm is cutting investment-banking operations around the world to focus on consumer and commercial lending in the wake of a UK-government bailout. The bank is part of a consortium that owns 40 percent of Alawwal following the ABN Amro Bank NV takeover in 2007. RBS’s stake in that consortium is just more than a third.
SABB’s agreement comes 19 years after Samba Financial Group merged with United Saudi Bank to create one of the largest regional financial institutions at the time, of which Citigroup Inc. owned 23 percent. The proposed merger “is likely to be the first of many” as Saudi lenders prepare for the kingdom’s reform plan Vision 2030, according to Bloomberg Intelligence banking analyst Edmond Christou.
France’s Credit Agricole SA last year agreed to sell half of its 32 percent stake in Banque Saudi Fransi to Prince Alwaleed bin Talal in a $1.54 billion deal, making the billionaire the bank’s largest investor.
Still, HSBC competes with other global investment firms that are also bolstering their Saudi operations to take advantage of business opportunities. Deutsche Bank AG has said it’s expanding in the kingdom as the outlook for bond and stock sales improves, while Citigroup recently won its first local advisory mandate since returning to Saudi Arabia after a 13-year absence.
Goldman Sachs Group Inc. has doubled its staff in Riyadh and has approached a Saudi state-owned entity about a multibillion-dollar deal as the US lender prepares to use its own money in the kingdom for the first time.