After a year of talks, Saudi British Bank (SABB) and Alawwal Bank have reached a preliminary, non-binding agreement to merge through the share exchange ratio.

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. SAAB, which is backed by HSBC, will offer to pay 28.5% premium to the Alawwal Bank, by valuing Alawwal Bank’s share price at SAR 16.3 and by valuing Alawwal Bank’s existing issued ordinary share capital at approximately SAR 18.6 billion (around $5 billion).

The proposed merger between SABB and Alawwal Bank would create the kingdom’s third-largest listed bank in terms of assets, profits and revenues. The two banks generate collectively $76.7 billion in total assets, while revenues around $3.4 billion, and profits about $1.4 billion, according to the financial statements of the two banks in 2017.

The two banks are active in commercial banking which constitutes around 80% of $31.2 billion SAAB’s loan portfolio and 68% of Alawwal bank’s loans at $16.7 billion. Meanwhile the retail banking is about 18% of SAAB’s portfolio and 28.5% for Alawwal Bank.

Saudi Olayan Group owns shares in both banks with 16.95% of SABB Bank and 21.7% of Alawwal Bank, while the General Organization for Social Insurance has 9.74% stake in SABB Bank, and 10.5% in Alawwal Bank.

Meanwhile HSBC through the HongKong and Shanghai Banking corporation owns 40% of SAAB, while Royal Bank of Scotland owns 40% of Alawwal Bank.

Following the announcement of the preliminary merger agreement, Alawwal Bank share price rose 10% to SAR 13.92 ($3.7), while SABB’s share price fell 4.5% to SAR32 ($ 8.5).

This announcement does not mean that the proposed merger will be agreed between the two parties or that an offer will be eventually made by SABB to Alawwal Bank shareholders in relation to the proposed merger.

The agreement is subject to a number of important steps (including completion of confirmatory due diligence, finalization of the merger agreement and agreement on a number of other commercial issues and any binding agreement to proceed with the merger will be subject to a number of conditions, including SAMA, other regulatory authorities, and the shareholders’ approval.