Saudi investors monitor stocks at at the National Commercial Bank (NCB) in Riyadh. The merger between NCB and Samba is expected to boost the asset management business of NCB. Image Credit: AFP

Dubai: The mega bank merger between National Commercial Bank (NCB) and Samba Financial Group currently underway is expected to boost the asset management business of NCB, and consolidate asset manaement business in Saudi Arabia, according to rating agency Moody’s.

Following the announcement of the merger agreement between NCB and Samba, the joint integration planning committee at the parent bank level approved the merger of the capitals between NCB Capital and Samba Capital & Investment Management Company (Samba Capital) once the banks merger has been completed.

Given the sophistication of the groups, Moody’s expects the merger to move relatively smoothly, and if successfully executed, the merger will bring long-term benefits to NCB Capital including some product diversification into fixed income and alternative products, based on the assumption that NCB Capital shall be the surviving entity. The company will also gain access to a new client and business-partner base.

Saudi asset management
Moody's estimates that the merged entity will have a combined market share of around 35 to 40 per cent.

Biggest asset manager

Moody’s expect the merger will reinforce the position of the new entity as Saudi Arabia’s biggest asset manager, based on assets under management (AUM).

As of end of September 2020, NCB Capital had a 31 per cent market share in Saudi Arabia, making it the largest player, while Samba Capital had a 4 per cent share, occupying the number 6 position. The rating agency estimates that the merged entity will have a combined market share of around 35 to 40 per cent.

NCB Capital’s AUM will increase by about 12 to 15 per cent, as of September 2020, creating a dominant player in the market, assuming that NCB Capital shall be the surviving entity. The entity will remain a small player on a global scale.

Downside risks

In Moody’s view, the merger poses some short-term downside risks. Profitability will likely be negatively affected because of merger related expenses, but we expect synergies to support operational efficiency and profitability over time. The merger also raises initial integration risks, including a potential loss of focus on executing approved budgets and projects given the merged entity’s large size.

While the merger will bring some diversification, the products offered will be similar, ranging from equity, fixed income, and multi assets to alternative products. Samba Capital introduced Saudi Arabia’s first ever sovereign sukuk fund in 2019.

While successful integration will lead to significant market share and efficiency gains, as well as technological enhancements, poor execution could lead to significant challenges such as loss of key personnel.

Consolidation of industry

The combined entity will likely absorb Samba Capital’s clientele, who will benefit from NCB’s stronger franchise and investment discipline. NCB also has a strong client servicing function, more diversified operations and income streams, and higher income.

The Saudi Arabian asset management sector remains fragmented with over 70 players in total. The top 5 asset managers accounted for over 65 per cent of industry AUM in June 2020. The Capital Market Authority (CMA) in 2020 lowered the required capital for asset managers

from SAR 50 million to SAR 20 million for managing investment funds and client portfolios and SAR 5 million for managing private non-real-estate investment funds and sophisticated investor portfolios which has lowered capital restrictions for new players.