Saudi Arabia is the latest Gulf state to witness banking sector consolidation as Alawwal Bank and Sabb enter discussions for a merger that could create the country’s third-biggest lender by assets.

If the deal goes ahead, the new entity will have an advantage over the competition, with Alawwal’s retail-heavy business model and Sabb’s strong corporate portfolio.

The possible link-up should prompt smaller banks in Saudi Arabia to consider merging. However, the kingdom’s central bank governor Ahmed al-Kholifey views it as a one-off transaction.

The UK’s Royal Bank of Scotland has a 40 per cent stake in Alawwal Bank, which has been up for sale for some time. Credit Suisse is assisting on the potential sale, which will become easier with dilution of shareholdings if the merger with Sabb goes ahead.

Credit Agricole is another lender looking to exit the Saudi market by selling its 31 per cent stake in Banque Saudi Fransi (BSF), but Al-Kholifey says the regulator has yet to receive an application from the French bank seeking approval for the sale.

It is evident the Alawwal-Sabb merger talks and the potential BSF stake sale are largely driven by broader group policies among banks to scale back operations in foreign markets, lending support to Al-Kholifey’s views on the improbability of a wider consolidation in the kingdom.

Necessity will dictate how many players will remain in the Middle East’s biggest banking market.