The ratings follow the announcement on 4 October 2018 that the duo has entered into a binding merger agreement.
Moody's has affirmed the local and foreign currency deposit ratings of Saudi British Bank (SABB) at A1 and those of Alawwal Bank (Alawwal) at A3.
In a statement, the rating agency stated that the affirmation of SABB's ratings reflects Moody's view that this merger upon completion will create the third largest bank in Saudi Arabia with approximately SAR 268 billion in total assets) and provide some increased diversification and lending opportunities in a slow economic environment as well as create medium-term potential for revenue and cost synergies.
Moody’s expects the strengths of the merger to offset integration risks and the absorption by SABB of Alawwal's loan portfolio, which has a higher proportion of problem loans.
Additionally, the affirmation of Alawwal's ratings and change of outlook to positive is driven by the view that the merger will be beneficial to the lender’s depositors as they will be transferred to SABB, a higher-rated entity.
Upon the completion of the merger when all liabilities are transferred to SABB, Moody's expects that the ratings on Alawwal will move to the same level as SABB and be withdrawn.
The merger remains subject to regulatory and shareholder approvals and is expected to complete in the first half of 2019 and upon the completion, SABB will remain as the operating entity and all of the assets and liabilities of Alawwal will be transferred to SABB in exchange for new SABB shares issued to Alawwal's shareholders.