The agreement, announced by the 2 banks on Wednesday but still non-binding, would create a lender with assets of around $77 billion, and is seen strengthening the banking system as Saudi Arabia embarks on a plan to transform its economy and cut its dependence on oil revenues.
The proposed merger of HSBC-backed Saudi British Bank (Sabb) and Alawwal would allow RBS, which was bailed out by the taxpayer during the financial crisis and is still 70 per cent owned by the United Kingdom government, to massively sell down its stake in Saudi-based Alawwal.
HSBC is already one of the most active global banks in the kingdom through its local investment banking unit - HSBC Saudi Arabia Ltd., in which the London-based lender owns a 49 percent stake.
SABB is 40 per cent owned by HSBC Holdings and Alawwal is 40 per cent owned by RBS Holdings NV, a consortium that includes Royal Bank of Scotland (RBS), which has been trying to reduce its stake for some time.
Two other sources close to the merger also said it could be easier for RBS to find a buyer for the smaller stake it will hold after the deal.
Based on this agreement, Alawwal Bank shareholders would receive 0.485 SABB shares for each Alawwal Bank share depending on this exchange ratio and the closing price of SAR 33.5 per SABB share at the last trading day prior to the date of this announcement.
Alawwal pointed out that while discussions were now at an advanced stage, any binding agreement to proceed with a merger would still be subject to a number of conditions, including shareholder and regulatory approvals.
Merger talks began past year but progress had taken longer than expected, partly because the regulatory environment for bank acquisitions in Saudi Arabia is relatively untested.