NCB-Samba merger builds regional powerhouse
- The combined entity will be third largest in MEA region and will be better able to fund Saudi Vision 2030 megaprojects
- Clear domestic leadership position with c30% market share but cost synergies must surprise positively
- Risks: revenue loss from integration disruption; customers diversifying their banking suppliers; political interference
Further to their preliminary announcement on 25 June, Saudi Arabia’s National Commercial Bank and Samba Financial Group have entered into a legally binding merger agreement. The transaction is subject to shareholder and regulator approval, and is expected to be completed in H1 21.
As part of the agreement, each Samba share will be exchanged for 0.739 NCB shares.
Despite a commitment to zero job losses, annual cost synergies are estimated by both companies to reach SAR800mn after three years, with one-off integration costs expected to be SAR1,100mn.
According to NCB Chairman Saeed Al-Ghamdi: "Saudi Arabia’s historic transformation with Vision 2030 requires highly capitalised banks that can fund economic development as well as support trade and capital flows’" Per Samba’s Chairman, Ammar AlKhudairy, "our merger will create a local leader and regional powerhouse".
A regional powerhouse, the third-largest bank in MEA region
The merger will create a business with US$233bn assets, ranking third in the Middle East and Africa, behind Qatar National Bank and First Abu Dhabi Bank.
A clear domestic leader
NCB-Samba will dwarf its local peers, being twice the size of its closest domestic rival, by assets.
The merged bank will have c30% of the Saudi banking market, with a clear leadership position across a wide range of products and services.
Moderately earnings dilutive for NCB shareholders; revenue attrition creates downside risk
Based on the announced exchange ratio of 0.739 NCB shares for each Samba share (at the lower end of the previously announced 0.736-0.787 exchange ratio range) and targeted cost synergies of SAR800mn, the transaction could be 6% dilutive for NCB shareholders on an EPS basis (using 2019 reported results as the basis for the calculation). On a BPS basis, the transaction appears slightly (4%) accretive.
Turning our attention to the targeted cost synergies, these are equivalent to 9% of the combined cost base, towards the lower range of what might be expected based on comparable transactions. However, the announced commitment to avoid layoffs creates a barrier to the rapid realisation of the transaction’s cost benefits, particularly as the rate of natural workforce attrition may be limited given sluggish economic growth.
For the transaction to be EPS-neutral, we estimate that pre-tax cost synergies of cSAR1.9bn would need to be generated, equivalent to c20% of the combined cost base.
Note that this calculation is very sensitive to the assumption that the transaction will not generate revenue losses. We think this is an optimistic perspective, for two reasons:
Customer-facing staff may understandably take their eyes off the ball during the integration phase, which could also generate some operational glitches; and
More importantly, customers (particularly larger ones) may seek to diversify their providers of finance to avoid being overly reliant on one institution.
Note that we think the FY 19 results are a more appropriate base for synergy calculations than H1 20; it is a longer period, and is not influenced by Covid-19 or the merger negotiations.
NCB will remain firmly in charge of the combined entity
On completion of the transaction, NCB shareholders will control 67% of the combined entity. NCB will also nominate nine of 11 seats at the Board of Directors (although six of these represent shareholders common to both entities, namely the Public Investment Fund, the Public Pension Agency and the General Organisation for Social Insurance). Samba’s Chairman, Ammar AlKhudairy, will become Chairman of the combined entity, while NCB’s Chairman, Saeed Al-Ghamdi, will become CEO of the merged business.
Transaction will put pressure on other regional players to follow suit
Other proposed regional transactions, such as KFH-AUB in Kuwait, and Masraf Al Rayan–Al Khaliji Commercial Bank in Qatar, highlight the challenging revenue environment in the GCC, with low oil prices crimping public spending (a key economic driver), low interest rates squeezing margins, and lockdowns accelerating customers’ adoption of cheaper digital banking products.
Looking at the 10 largest GCC banks by assets, the average trailing PE is 12.9x, PB is 1.6x and DY is 5.3%. On a proforma basis, a merged NCB-Samba is not too far from these numbers.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...