Saudi Arabia: Today marks a legal milestone in the merger of National Commercial Bank and Samba Financial Group under the name of Saudi National Bank (SNB). As the execution of mergers and acquisition transactions are complex and time-consuming, the legal date of April 1 will be followed by continuous efforts to combine the entities.

With SR837 billion ($223 billion) in assets, SNB will be Saudi Arabia’s largest bank, accounting for a market share of 25 percent across all metrics. It will be well capitalized with a combined equity of SR120 billion. The combination of the country’s largest with its fourth-largest lender creates a national champion across the board. It is bound to be profitable for shareholders, with estimated synergies worth SR800 million. It was already profitable for Samba shareholders, who received a premium over the unaffected share price.

The largest shareholder in SNB is the Public Investment Fund — the Saudi sovereign wealth fund — who, together with the Public Pension Agency and General Organization for Social Insurance, holds just above 50 percent of the shares.

The scope and size of the new entity will allow it to take on an important position in both commercial, retail and mortgage space, with the added benefit of honing in on the digital transformation. It will also become a place for leadership development for the banking sector as well as the country at large. 

Saudi Vision 2030 has explicitly advocated national champions, and SNB fulfills this role in the banking sector. Vision 2030 also has a number of flagship projects that will require financing from solid banks. Last Tuesday, Crown Prince Mohammed bin Salman furthermore launched a $3.2 trillion initiative to boost the private sector. This will require institutions to finance and refinance private sector entities, some of which have been hard hit by the pandemic.

He announced that the Shareek program will enable the private sector to play a much more prominent role in the development of the country, amounting to 65 percent of the gross domestic product (GDP) within this decade. The Kingdom needs a strong banking sector led by great institutions to live up to this goal.

From a more macro perspective, SNB will be the region’s third-largest lender. The Gulf Cooperation Council (GCC) is overbanked, as is Europe. In Saudi Arabia, 30 banks cater to 30 million inhabitants. The merger of Samba and National Commercial Bank is an important step toward the consolidation in the sector. In 2019, we saw this in the UAE, with the combination of Abu Dhabi Commercial Bank, Union National Bank and Al-Hilal Bank.

On March 14, S&P Global published a report on the banking sector in the region. The authors delineated that the banking sector was suffering from a triple shock of lower lending revenues due to a pandemic-induced economic downturn, lower for longer interest rates and higher costs due to higher risks, resulting in the need for further consolidation, especially in a region as overbanked as the GCC.

The authors also argued that the first wave of consolidation induced by shareholders’ value will be followed by a second wave that will stem from the shock to profitability in 2020.

All of the above proves that creating a national champion in a sector that is vitally important for the future of the country’s development makes sense during the current circumstances when the Kingdom, the GCC and the world at large are recuperating from the economic aftershocks of the pandemic.

The region is overbanked, and consolidation needs to happen. First movers always have an advantage. The SNB can build its business on the basis of a strong capital base and alignment with Saudi macroeconomic strategy and direction.