Saudi Arabia’s largest bank by assets, the National Commercial Bank (NCB), is buying the fourth largest, Samba Financial Group, for $15.4 billion. The combined company will be the third-largest lender in the GCC with combined assets worth $220 billion.
NCB’s existing shareholders will own 67.4 percent and Samba’s shareholders will own 32.6 percent of the new entity. The Saudi Public Investment Fund (PIF) will be the largest shareholder of the combined with 37.2 percent. The Saudi Public Pension Agency and the General Organization for Social Insurance will own 7.4 percent and 5.8 percent, respectively.
Times of crisis sometimes accelerate change. The GCC economies have been hit by the twin shocks of lower oil prices and the coronavirus disease (COVID-19) outbreak. The latter brought economies the world over to their knees, courtesy of lockdowns. It also had an impact on the GCC economies.
Among other stimulus measures, the Saudi Arabian Monetary Authority had reacted decisively by injecting $13 billion to support the private sector in March and then again in June to provide another $13 billion liquidity for the financial sector. Time had come for the banking sector to respond to the challenges.
Saudi Arabia’s 30 million people are served by 30 banks. That is a high ratio of people to banks. Consolidation was inevitable at some stage and the state of the global economy has accelerated the pace. NCB had been looking to create scope before but had abandoned plans to merge with Riyad Bank in December of 2019. NCB was clearly ready to create scope and scale now.
There had been mergers in the UAE in previous years and it was only a matter of time before Saudi Arabia would follow suit. NCB’s acquisition of Samba is globally the largest bank merger to date in 2020.
Europe has been rife with talk of mergers and acquisitions (M&A) activity in the banking sector. The continent has so far seen Italy’s Banca Intesa Sanpaolo SpA acquire Reyl and Cie SA. Spain’s Unicaja Banco is discussing a merger with Liberbank SA and the Spanish Caixa Bank is still talking to Bankia SA, which would create Spain’s biggest bank. There are reports on the continent of other banks, some of them very large, considering M&A activity.
As mentioned above, the GCC is overbanked — just as Europe is. In this context, news of the NCB-Samba deal is both welcome and important. According to Bloomberg, fully calculated annual synergies will amount to SR800 million ($213 million).
The combined company will be the third-largest lender in the GCC with combined assets worth $220 billion.
The deal was good for Samba shareholders as NCB offered a 27.5 percent premium over the Wednesday closing price of Samba shares. NCB shares were up by close to 1.5 percent on Monday.
More importantly, combining the two banks supports Saudi Vision 2030, which foresees the creation of national champions. Vision 2030 will modernize the country’s economy to overcome its over-reliance on oil. It will create new sectors such as tourism, industry, renewable energy, etc. with strong private-sector participation. All of this requires a strong financial sector with strong leading banks.
The COVID-19 pandemic will necessitate restructuring lending portfolios in financial institutions the world over. A combined strong entity with a good capital base can use its economies of scale to do so.
More M&A activity in the GCC’s financial sector should be expected, allowing banks to be able to cope with the challenges of a post-COVID-19 economy.