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RBS set to move closer to privatisation after Saudi Arabian bank merger

HSBC affiliate Saudi British Bank has offered to buy RBS-backed Alawwal Bank in a US$5bn stock deal
RBS is still 70% owned by the government

Royal Bank of Scotland PLC (LON:RBS) could be brought another step closer to returning to private hands if a proposed Saudi Arabian bank merger goes ahead.

Saudi British Bank (SABB), which is 40% owned by HSBC Holdings PLC (LON:HSBA), has offered to take over RBS-backed Alawwal Bank in a US$5bn stock deal.

"Discussions are now at an advanced stage, [but] any binding agreement to proceed with a merger will still be subject to a number of conditions, including shareholder and regulatory approvals," Alawwal said in a statement.

RBS is part of a consortium, including Santander and Fortis, that owns 40% in Alawwal following the takeover of ABN Amro Bank NV in 2007. 

RBS owns just over a third of a stake in the consortium but has to hold £5.9bn on its balance sheet to cover Alawwal if it went insolvent.

Proposed merger to boost RBS balance sheet 

The bank has been trying for years to sell down its holding in Alawwal as it shifts its focus to its core UK business.

A merger between SABB and Alawwal would allow RBS to wind down its holding in the Saudi Arabian bank and would cut risk-weighted assets on its balance sheet.

RBS would own 5% in the enlarged group, meaning it would only have to hold just under £1bn on its balance sheet to cover risks.

This could help pave the way for the government to sell down its stake in RBS.

Government could be closer to selling down RBS stake

RBS remains 70% owned by the government following a taxpayer bailout during the 2008-09 financial crisis.

Chancellor Philip Hammond has suggested he is waiting for the bank to resume dividends and for its share price to rise before selling the government’s shares.

Legacy issues have weighed on the bank’s share price and earnings, holding back RBS from resuming dividends.

But in May RBS came closer to resolving its legacy issues by agreeing a US$4.9bn settlement with the US Department of Justice to end an investigation into the sale of mortgage-backed securities.

READ: Investors in RBS breathe sigh of relief as lender agrees smaller than expected settlement with the US DoJ

The penalty was much less than estimates published in the media ranging up to US$13bn and drew a line under an issue that has been hanging over the bank’s head for some time.

The company has also made progress in its turnaround plan, reporting its first annual profit in a decade in February. 

READ: RBS reports first profit in a decade but shares fall on concerns about hefty US fines

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