The US-based lender JPMorgan Chase is advising Saudi Arabia’s Alawwal Bank on its proposed merger with Saudi British Bank (Sabb) that would create the third biggest lender in the kingdom by assets.

Alawwal had earlier proposed Credit Suisse as adviser on the deal but the banking regulator Saudi Arabian Monetary Authority (Sama) asked to appoint another investment bank to avoid conflict of interest as Olayan family, which has stakes in international lenders including Credit Suisse, is a common shareholder of both Alawwal and Sabb.

Alawwal has selected the US-headquartered Baker McKenzie has legal advisors on the deal, the sources said. It is not clear which firm is advising HSBC-backed Sabb on the transaction.

The deal is progressing, and it is expected to gain momentum later in the last quarter of this year, the sources added.

Alawwal and Sabb entered into preliminary discussions for potential merger in April and said that although the respective boards have agreed to talks, these discussions do not necessarily mean that a between the two banks will take place, according to their separate statements at the time to Saudi Stock Exchange (Tadawul) where their share are traded.

The potential combination of banks is subject to various conditions including assent from the shareholders and a formal approval from Sama. Both lenders have stressed that the proposed deal will not result in any “involuntary redundancies among employees”.

Royal Bank of Scotland controls a 40 per cent stake of Alawwal Bank, through its 2007 acquisition of ABN Amro. RBS’s stake in the lender has been available for sale for some time as it reduces its presence in international markets. It had hired Credit Suisse to sell its stake in Alawwal, which was formerly known as Saudi Hollandi Bank. HSBC owns 40 percent of Saudi British Bank

Olayan, a prominent merchant family in the kingdom, controls 21.76 per cent of Alawwal Bank and 16.98 per cent in Sabb. The government of Saudi Arabia also owns 10.5 per cent of Alawwal and 9.74 per cent of Sabb.

The merger will create an asset base of nearly $80bn, which will be third biggest after National Commercial Bank and Al-Rajhi Bank. If the deal goes ahead, the merged entity will have an advantage over the competition with Alawwal chipping in its retail-heavy business model and Sabb bringing its strong corporate portfolio to the table. Saudi Arabia currently has 12 commercial banks with total assets of about $535bn.

Mergers and acquisitions are a rare in Saudi Arabia, the region’s biggest banking market. The kingdom’s central bank governor Ahmed al-Kholifey, earlier this month, said that Alawwal-Sabb merger was a one-off transaction and he more such deals in the kingdom were not expected.

“I don’t see any in the pipeline,” Al-Kholifey told reporters in the first week of May.

Credit Agricole is another lender looking to exit Saudi market by selling its 31 per cent stake in Banque Saudi Fransi, but, Kholifey at the time said that he had met with the officials from the French lender and the regulator has yet to receive an application, seeking approval for the sale.

Elsewhere in the region, M&A activity has picked up as lenders look to gain scale and improve competitiveness amid difficult economic conditions and offset a decline in government and consumer spending.

Abu Dhabi’s top lenders First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) have already completed their merger at the end of first quarter this year, which has created the second-biggest bank in Middle East and North Africa (Mena) region after Qatar National Bank. Within the gas-rich Qatar Masraf Al Rayan is engaged with Barwa Bank and International Bank of Qatar for a three way merger.