Saudi Hollandi back on the auction list

Saudi mid-sized bank, Saudi Hollandi Bank, is actively back on the auction list. Acquired by the Royal Bank of Scotland, and its partners Fortis Group and Bank Santander, through its acquisition of ABN Amro in 2007, the 40 per cent stake is expected to be sold within the next two months providing there is no hiccup, mainly in respect to approval from Saudi regulatory authorities.

For a number of banks eyeing the stake, the Saudi Hollandi acquisition represents a rare and ideal opportunity to gain entry into the important Saudi banking sector. However, reflecting the potential of the Kingdom's banking sector as well as Saudi Hollandi's noted domestic franchise, the 40 per cent stake is expected to reach US$2 billion in value, representing a multiple of over three times book value.

A number of banks have publicly stated their interest in Saudi Hollandi. The GCC's biggest bank, Emirates NBD is keen to acquire a stake as it has long targeted entry into the Saudi market to develop retail banking in the largest market in the Gulf. It is expected that Emirates NBD will be one of the main parties interested and will compete aggressively for the stake.

Emirates NBD has a strong 21 per cent market share of banking assets in the UAE but needs to expand regionally to achieve its objective of being a dominant pan-GCC bank. The continued expansion of its activities in the Islamic banking sector sits well with a potential large move into the Saudi market.

Other banks interested in the stake include National Bank of Kuwait and Standard Chartered. NBK stated some time ago that the bank was interested in acquiring the holding. Although also keen to gain a large foothold in the Saudi market, it is unlikely NBK will overpay for the stake.

On the other hand, Standard Chartered is believed to be very keen on the sale, having previously applied unsuccessfully for a full banking licence in Saudi Arabia, and has significant financial resources to make a high bid. Despite a downturn in banking sector profitability over the last eighteen months, the Saudi banking sector is still one of the most profitable banking sectors both in the GCC and internationally.

The Saudi banking system achieved a return on assets of three per cent in 2007, still high against most other GCC banking sectors where the average is 2.4 per cent, but down from 4 per cent in the previous year. Saudi banks' return on equity was a high 23.5 per cent in 2007 although again down from a high 30 per cent previously.

Profit has been hit by lower income from Saudi stock market activity and fund management operations due to lower transactional volume and hence weaker commissions and fees. However, going forward, the Saudi market is expected to lift.

Asset growth in the Saudi banking sector has been strong over the last few years and is expected to continue growing strongly over the next few years. Assets grew by 35 per cent in 2007.

Saudi banking sector's penetration is the lowest in the GCC with a total loans to GDP ratio of 43 per cent, and deposits to GDP at 50 per cent. Demographic characteristics are also favourable, with 50 per cent of the population under the age of 19. The economic environment is positive with strong GDP growth and rising government spending.

Loan growth is also on an upward trend now with good domestic demand. Corporate credit and investment banking are becoming important loan areas, particularly connected to infrastructure spending and industrial expansion. Demand for credit rebounded in 2007, posting 23 per cent year on year growth. The trend continued into the first quarter of 2008 with total loans of the banking sector rising 33 per cent compared to the first quarter of 2007. The development of mortgage financing laws should also underpin loan growth going forward in Saudi Arabia.

Emirates NBD's return on assets was 1.6 per cent with return on shareholder's equity 15.7 per cent. Looking ahead, the bank hopes to expand its wealth management business and the purchase of the stake in Saudi Hollandi would quickly provide a very strong platform.

Other activities where synergy would be created with Saudi Hollandi include investment banking, asset management, real estate, trust and family office product capabilities. Management also aim to enhance cross-selling to the corporate and institutional clients base in its investment banking division and expand its Islamic banking assets.

Saudi Hollandi's net profit fell by around 50 per cent last year. Return on equity was just 8.9 per cent with a return on assets of 0.9 per cent. The decline was mainly attributable to credit provisions made during the year and reduced commission income. However, Saudi Hollandi Bank reported a net profit of SR282m for the three month period ended 31 March 2008 (SR215m for the same period in 2007), an increase of 31 per cent.

The increase was driven by growth in both the bank's investment and lending portfolios and in fee income - principally associated with trade finance - coupled with strong performances in treasury and foreign exchange. Return on equity at 31 March 2008 was 24.2 per cent and return on assets rose to 2.1 per cent.

Saudi Hollandi has a good franchise in the lucrative and high potential Saudi market. The sale of the 40 per cent stake represents an excellent opportunity to enter the large market. It is for these reasons that the stake will attract a keen price.

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