Saudi Arabia’s Alawwal Bank and Saudi British Bank (Sabb) have entered into preliminary discussions for a potential merger that could create the third-biggest lender by assets in the Middle East’s top banking market.

The lenders in separate statements to Saudi Stock Exchange (Tadawul), where their share are traded, said that their respective boards have agreed to enter talks, however, “these discussions do not mean that the merger will happen between the two banks”.

The potential combination of banks is subject to various conditions including a nod from the shareholders. Alawwal and Saudi British have already informed the banking regulator, Saudi Arabian Monetary Authority (Sama), about these discussions, however, the merger will still be subject to its formal approval.

Both banks stressed that the proposed deal will not result in any “involuntary redundancies among employees”.

Saudi Arabia’s economy has slowed since mid-2014 as a result of lower oil prices. Most banks in the kingdom have reported weaker earnings in recent quarters and tighter profit margins on the back rising provisions for bad loans, especially, on contracting and corporate sector debts.

Royal Bank of Scotland controls a 40 per cent stake in Alawwal Bank, through its 2007 acquisition of ABN AMRO. RBS’s stake in the lender has been on the block for sale for some time as it reduces presence its international markets. It had hired US’ 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 family, a prominent merchant family in the kingdom, which has stakes in international lenders is a common shareholder of the two Saudi banks. It 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 nearly $80bn, which will be third biggest after National Commercial Bank and Al Rajhi Bank. Saudi Arabia currently has 12 commercial banks with total assets of about $535bn.

The Saudi lenders are taking a cue from the UAE and Qatar where banks are looking to merge to gain scale and improve competitiveness amid difficult economic conditions as government and consumer spending slows.

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.