Saudi Riyad Bank’s <1010.SE> shares surged 5 percent, its biggest intra-day gain since June 5, after it announced merger talks with National Commercial Bank (NCB) <1180.SE> in a move analysts said could trigger a wider banking consolidation.
Shares of NCB, the kingdom’s biggest lender by assets, were flat after opening weaker, while shares of smaller lenders such as Al Jazira Bank <4331.SE> and Bank Albilad <1140.SE> were down in early trade.
“If the merger goes through, it will create added pressure on smaller banks to consolidate,” said Shabbir Malik, regional financial analyst at investment bank EFG Hermes.
A merger between NCB and Riyad Bank would further extend NCB’s lead over its closest rivals including Al Rajhi Bank <1120.SE>, by boosting its assets by almost a third to $183 billion.
The move comes two months after Saudi British Bank (SABB) <1060.SE> and smaller rival Alawwal Bank <1040.SE> agreed to a binding deal to create Saudi Arabia’s third-biggest lender in the first major tie-up for the country’s banking sector in recent times.
Consolidation has increased in the past two years as profit margins have been squeezed by lower government and consumer spending in the face of weak oil prices.
The latest merger move is expected to erode the competitiveness of the banking industry “which means further consolidation between smaller banks is most likely a scenario going forward,” said Aarthi Chandrasekaran, vice president at Shuaa Capital.
Analysts said Riyad could benefit from NCB’s strong balance sheet given it has a high loan-to-deposit ratio, while NCB could use Riyad’s expertise in growing its long-term deposits.
Saudi Arabia has only 12 commercial lenders, which will be reduced to 11 after the completion of merger between SABB and Alawwal.
“Unlike the UAE, (Saudi) is not a fragmented or overcrowded market… So the main dynamics of consolidation have to come from strategic shareholder value proposition or from a generic efficiency motto,” said Chandrasekaran.