Royal Bank of Scotland Group PLC Impact of Alawwal bank / Saudi British Bank merger

Royal Bank of Scotland Group plc (LON:RBS) notes the completion of the merger of Alawwal bank and Saudi British Bank announced on 16 June 2019.  The completion of the merger impacts RBS and its subsidiaries NatWest Markets N.V. and NatWest Markets Plc. 

RBS, through its Dutch subsidiary NWM NV, held an aggregate 40% shareholding in Alawwal bank on behalf of itself, Stichting Administratiekantoor Beheer Financiële Instellingen and Banco Santander S.A. which dated back to RBS’s acquisition of ABN AMRO in 2007.  The economic interest of RBS was equivalent to a 15.3% shareholding in Alawwal bank.

As a result of the Merger NWM NV received an aggregate shareholding of 10.8% in SABB, representing the total interests of the Consortium.   NWM NV then immediately transferred the RBS economic interest of 4.1% in SABB to NWM Plc, and the balance of the shares separately to NLFI and Banco Santander S.A., as part of an unwind of the Consortium arrangements. 

NWM NV is reported as part of RBS’s NatWest Markets franchise.  NWM NV is now expected to transfer to NWM Plc ownership during the second half of 2019, subject to regulatory approvals, and will continue to be reported as part of the franchise.

Commenting on the transaction, Ross McEwan, CEO of RBS said,

We are pleased that this merger has now concluded; it will help facilitate the future exit of our shareholding as we continue to focus on our key target markets.  The release of capital will also have a positive and material financial impact for RBS.”

Impact of the Merger on RBS

·      Within the NatWest Markets franchise, RBS will recognise an income gain on disposal of the Alawwal bank stake for shares received in SABB of £0.4 billion and a reduction in risk weighted assets (“RWAs”) of £4.7 billion.  

·      Within Central Items, RBS will recycle foreign exchange of £0.3 billion which is capital neutral and will in addition extinguish legacy liabilities of £0.3 billion.

·      The gains above the line will be partially offset by £0.3 billion of non-controlling interests.

·      These impacts would have increased the 31 March 2019 CET1 by 60bps, being 20bps attributable profit and 40bps RWA relief.

The profit and loss impacts on franchises are summarised in Table 1 below, with affected entities noted.

Table 1

 £bn NWM franchise Central Items RBS Group Entity
Gain on disposal 0.4 0.4 NWM NV
Legacy liability release 0.3 0.3 RBS
FX reserves recycling 0.3 0.3 RBS
Non interest income 0.4 0.6 1.0
Profit after Tax 1.0
Non-controlling interests (0.3) RBS
Profit attributable to ordinary shareholders 0.7

We estimate a further £1.2 billion of FX reserves recycling to be crystallised through RBS at the point at which NWM NV transfers ownership to NWM Plc during the second half of 2019, subject to regulatory approval, which is also capital and TNAV neutral.

Table 2 illustrates the risk weighted asset movements related to the transactions. These are indicative of the expected impact and act only as a guide.

Table 2

NWM NV NWM Plc Group Adjustment RBS Group
As at 31 March 2019 €6.5bn £5.6bn
Transaction impact (€6.5bn) £0.4bn £0.5bn (£4.7bn)
Adjusted 31 March 2019 £0.4bn £0.5bn £0.9bn

Notes

–       The above does not include operational risk RWAs related to the stake in Alawwal bank

–       Table shown using exchange rates as at 31 March 2019 with £1:€1.162 and a SABB share price of SAR37.80. RWA impact may vary as a result of fluctuations in FX rates, SABB share price or the underlying CET1 capital base of NWM Plc. At 13 June 2019, the SABB share closing price was SAR 41.70.  As at 14 June 2019, the relevant FX rate was £1:€1.1232.

Impact of the Merger on NWM Plc

NWM Plc acquired the SABB shares attributable to RBS from NWM NV for £0.7bn, which will be carried at fair value through equity until sold.  The SABB shares are subject to a 6 month lock up period for sale outside RBS.  The investment will give rise to RWA of £0.4bn, as well as a capital deduction for non-significant investments.

Ownership of NWM NV is expected to transfer under NWM Plc in H2 2019, subject to regulatory approval.

Impact of the Merger on NWM NV

In addition to the impacts noted in Tables 1 and 2, above, NWM NV will make capital distributions to NLFI and Santander and will replace this with internal capital issuance to RBS entities in June 2019. The impact of the RWA reduction is expected to improve NWM NV’s capital ratios in H1 2019.

Each of RBS, NWM Plc and NWM NV will publish their H1 2019 accounts on 2 August 2019.