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NCB-SAMBA Merger

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NCB-SAMBA Merger June 29, 2020 SAUDI ARABIAN BANKS NCB-SAMBA Potential Merger Big Merger Two of the largest banks in the Kingdom, National Commercial Bank (NCB) and Samba Financial Group (SAMBA) announced on June 25th, 2020 at the Tadawul that they have entered into a Framework Agreement to start a reciprocal due diligence process and to negotiate terms of a potential deal. If this takes place, it will be the second merger in the Saudi banking sector since the merger of SABB and Alawwal during 2Q2019. The market has responded positively with SAMBA rising +10% and NCB closing the day up +5% on the first trading day post announcement. As per details, NCB will be the merging bank and SAMBA the merged bank. NCB will merge SAMBA’s assets and liabilities into its books (SAR 267 bln and SAR 222 bln respectively, as per 1Q2020 financials) and issue NCB shares to SAMBA shareholders. We expect synergies to create cost savings over the next few years as well as a more diversified client base. NCB will consolidate its position and become by far the largest bank in the Kingdom in terms of assets, as shown in the exhibit below: Exhibit 1: Banks Total Assets Post-Merger (SAR million) Assets - 1Q2020 1,000,000 800,000 600,000 400,000 200,000 - New entity Alrajhi RB SABB ANB BSFR Alinma SAIB Aljazira Albilad (NCB+SAMBA) Source : Riyad Capital, Companies Reports We believe this merger could strengthen the Saudi banking sector and will create a large r entity capable of financing mega deals and keep pace with the next stage of Vision 2030 and it ambitious goals. Moreover, it will be able to better compete with regional and international banks. There are concerns about competition within the banking sector, as this creates a giant player in the market but SAMA has repeatedly shown it is more than capable to effectively regulate the banking sector. Table 1: Key Balance Sheet items (SAR million) NCB SAMBA New entity Capital * 30,000 20,000 44,720 - 45,740 Assets 535,007 267,083 802,089 Loans 305,214 147,822 453,036 Deposits 375,241 177,710 552,951 Source: Riyad Capital, 1Q2020 Company Financials * based on the Exchange Ratio Range (0.736 - 0.787) Rawabi A Al Mutaywia [email protected] Riyad Capital is licensed by the Saudi Arabia Public +966-11-203-6805 Capital Market Authority (No. 07070-37) SAUDI ARABIAN BANKS NCB-SAMBA Potential Merger What Happens Post-Merger Domestic The new entity will be the largest bank in the Kingdom in terms of Assets, Loans, Deposits as well as Capital, as shown in the exhibits below: Exhibit 2: Banks' Ranking Post-Merger by Advances (SAR million) Advances - 1Q2020 500,000 400,000 300,000 200,000 100,000 - New entity Alrajhi RB SABB BSFR ANB Alinma Albilad SAIB Aljazira (NCB+SAMBA) Source : Riyad Capital, Companies Reports Exhibit 3: Banks' Ranking Post-Merger by Deposits (SAR million) Deposits - 1Q2020 600,000 500,000 400,000 300,000 200,000 100,000 - New entity Alrajhi RB SABB BSFR ANB Alinma Albilad SAIB Aljazira (NCB+SAMBA) Source : Riyad Capital, Companies Reports Exhibit 4: Banks' Ranking Post-Merger by Capital (SAR million) Capital - 1Q2020 50,000 40,000 30,000 20,000 10,000 - New entity RB Alrajhi SABB Alinma ANB BSFR Aljazira SAIB Albilad (NCB+SAMBA) Source : Riyad Capital, Companies Reports Further details are in the Appendix at the end of the report. Page 2 of 6 Public SAUDI ARABIAN BANKS NCB-SAMBA Potential Merger GCC Region The new entity will be the third largest bank in the GCC in terms of Assets, as shown in the exhibit below: Exhibit 5: Banks' Ranking by Assets (USD billion) Assets - 1Q2019 Qatar National Bank First Abu Dhabi Bank New entity (NCB+SAMBA) Emirates NBD Abu Dhabi Commercial Bank Alrajhi Bank National Bank of Kuwait* Dubai Islamic Bank Riyad Bank SABB - 50 100 150 200 250 300 Source : Riyad Capital, Argaam * FY 2019 Results Exchange Ratio According to the announcement, the two banks agreed on an exchange ratio range between 0.736 and 0.787 shares for each SAMBA share. As per NCB’s price on June 24th of SAR 37.25/share, the offered price will range between SAR 27.42 and SAR 29.32 per share, which is a 19.2% - 27.5% premium over SAMBA’s stock price on June 24th. While the premium to June 24th price may look high, we have to realize that NCB trades at a much higher P/B than SAMBA. For 2019, NCB and SAMBA’s P/B at current price are 1.6x and 1.0x respectively. Thus, a 19% to 28% premium appears justified as it takes SAMBA closer to the sector average of 1.5x. Table 2: NCB-SAMBA Stock Price Guide (SAR) NCB stock price 37.25 37.25 Swap ratio 0.736 0.787 SAMBA stock price 27.42 29.32 Source: Riyad Capital As a result of the exchange ratio above, if the potential transaction is completed, the total consideration payable by NCB to SAMBA’s shareholders will range between approximately 1,441 million - 1,540 million new NCB shares. Page 3 of 6 Public SAUDI ARABIAN BANKS NCB-SAMBA Potential Merger NCB and SAMBA’s Recent Performance NCB in 1Q2020 NCB grew its loan portfolio at a higher pace of +8% Q/Q compared to the previous quarters, adding SAR 22.9 bln, while deposits continued their uptrend, growing by SAR 21.9 bln Q/Q. Thus, LDR rose from 80% to 81%. NCB reported a net income of SAR 2.8 bln, up +2% Y/Y but declined -16% Q/Q. SAMBA in 1Q2020 Net financing continued its uptrend for the third consecutive quarter, adding SAR 6.2 bln while deposits declined again after one quarter of improvement. LDR increased from 78% last quarter to 83%, one of the lowest LDR amongst peers, providing ample room for loan growth albeit in a tough environment. Samba’s bottom-line positively surprised the market with a +20% Y/Y and +67% Q/Q growth. Both of the banks are in a good position currently, yet this merger would create a bigger and stronger combined entity, especially at a time when other foreign banks are trying to establish a presence in the Kingdom. Exhibit 6: Assets Breakdown by Operating Segments NCB SAMBA International, Investment Capital 7% banking Market,0.4% 0.04% Retail 14% Retail,30% Treasury Treasury 39% ,37% Corporate 47% Corporate ,26% Source : Riyad Capital, 2019 Companies Reports As shown in the exhibit above, NCB has a bigger presence in the Retail Segment, while SAMBA stands out more in the Corporate Segment. If the merger happens, it would create synergies and value for the shareholders. We expect the stock price of the two banks to converge towards this Exchange Ratio i.e. through a combination of an increase in SAMBA share price and/or a decrease in NCB stock price to eliminate any arbitrage opportunities, assuming the exchange ratio. Common Shareholders There are three main common shareholders in NCB and SAMBA: Public Investment Fund (PIF), Public Pension Agency (PPA) and General Organization for Social Insurance (GOSI). The following table shows the percentage holding as of June 25th. Table 3: Main Common Shareholders between NCB and SAMBA Shareholders Name NCB SAMBA Public Investment Fund (PIF) 44.29% 22.91% Public Pension Agency (PPA) 5.36% 11.54% General Organization for Social Insurance (GOSI) 5.18% 7.09% Source: Riyad Capital, Tadawul Page 4 of 6 Public SAUDI ARABIAN BANKS NCB-SAMBA Potential Merger Appendix Appendix 1: Banking Sector Assets (SAR million) Appendix 2: Banking Sector Capital (SAR million) Pre-Merger Post-Merger Pre-Merger Post-Merger Bank Assets Bank Assets Bank Capital Bank Capital NCB 535,007 New entity (NCB+SAMBA) 802,089 NCB 30,000 New entity (NCB+SAMBA) 44,720 - 45,740 Alrajhi 391,901 Alrajhi 391,901 RB 30,000 RB 30,000 RB 279,697 RB 279,697 Alrajhi 25,000 Alrajhi 25,000 SABB 265,472 SABB 265,472 SABB 20,548 SABB 20,548 SAMBA 267,083 ANB 184,871 SAMBA 20,000 Alinma 20,000 ANB 184,871 BSFR 178,149 Alinma 20,000 ANB 15,000 BSFR 178,149 Alinma 138,021 ANB 15,000 BSFR 12,054 Alinma 138,021 SAIB 100,805 BSFR 12,054 Aljazira 8,200 SAIB 100,805 Aljazira 89,734 Aljazira 8,200 SAIB 7,500 Aljazira 89,734 Albilad 88,498 SAIB 7,500 Albilad 7,500 Albilad 88,498 Total 2,519,237 Albilad 7,500 Total 191,542 Total 2,519,237 Total 195,802 Source : Riyad Capital, Companies 1Q2020 results Source : Riyad Capital, Companies 1Q2020 results * based on the Exchange Ratio Range (0.736 - 0.787) Appendix 3: Banking Sector Loans (SAR million) Appendix 4: Banking Sector Deposits (SAR million) Pre-Merger Post-Merger Pre-Merger Post-Merger Bank Loans Bank Loans Bank Deposits Bank Deposits NCB 305,214 New entity (NCB+SAMBA) 453,036 NCB 375,241 New entity (NCB+SAMBA) 552,951 Alrajhi 261,385 Alrajhi 261,385 Alrajhi 315,661 Alrajhi 315,661 RB 182,784 RB 182,784 RB 192,902 RB 192,902 SABB 157,839 SABB 157,839 SABB 188,275 SABB 188,275 SAMBA 147,822 BSFR 134,882 SAMBA 177,710 BSFR 146,772 BSFR 134,882 ANB 119,938 BSFR 146,772 ANB 135,984 ANB 119,938 Alinma 97,784 ANB 135,984 Alinma 103,874 Alinma 97,784 Albilad 62,579 Alinma 103,874 Albilad 68,377 Albilad 62,579 SAIB 59,877 Albilad 68,377 SAIB 67,642 SAIB 59,877 Aljazira 51,979 SAIB 67,642 Aljazira 62,669 Aljazira 51,979 Total 1,582,083 Aljazira 62,669 Total 1,835,107 Total 1,582,083 Total 1,835,107 Source : Riyad Capital, Companies 1Q2020 results Source : Riyad Capital, Companies 1Q2020 results Page 5 of 6 Public SAUDI ARABIAN BANKS NCB-SAMBA Potential Merger Stock Rating Buy Neutral Sell Not Rated Expected Total Return Expected Total Return Expected Total Return Under Review/ Restricted Greater than +15% between -15% and +15% less than -15% * The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected] Disclaimer Riyad Capital is a Saudi Closed Joint Stock Company with Paid up capital of SR 200 million, licensed by the Saudi Arabian Capital Market Authority NO.07070-37.
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