In Q3, 2020, National Commercial Bank (NCB, A1 negative, baa1) and Samba Financial Group (A1 negative, a2) entered a binding merger agreement. Following the announcement of this merger agreement, 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 and Moody's affirmed the MQ1 investment manager quality assessment of NCB Capital. The merger — subject to obtention of regulatory approval — will lead to a consolidation of the groups' asset management subsidiaries, NCB Capital (MQ1) and Samba Capital. This will reinforce the position of the merged entity as Saudi Arabia's biggest asset manager, based on assets under management (AUM). Given the sophistication of the groups, we expect 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. As of end of September 2020, NCB Capital had a 31% market share in Saudi Arabia, making it the largest player, while Samba Capital had a 4% share, occupying the No. 6 position. We estimate that the merged entity will have a combined market share of around 35%-40%. NCB Capital's AUM will increase by about 12%-15%, pro-forma 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. 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. As the asset management business is heavily reliant on the quality of its employees, we consider this to be a significant risk. In addition, smooth and efficient decision making processes may be affected due to the merged entity's more complicated organization structure, potentially leading to compliance and risk management issues, or even regulatory disputes and an eventual loss of clients. Duplication of costs could also be an issue. 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. — SG
