As a result of a Saudi Arabian bank deal announced yesterday, Royal Bank of Scotland (RBS) could potentially be a step closer to returning to private ownership, as it would be able to relinquish $5bn in the Saudi bank.

The proposed merger of HSBC-backed Saudi British Bank (Sabb) and Alawwal would allow RBS, a bank that is 70 per cent owner by the UK government, to massively sell down its stake in Saudi-based Alawwal.

RBS, along with Santander and Fortis, took 40 per cent of Alawwal when it acquired ABN Amro in 2007. Although RBS only owned 15 per cent of the Saudi bank, it had to hold £5.9bn on its balance sheet to cover Alawwal in the instance that it went insolvent.

If the proposal went ahead, the merged Sabb-Alawwal will become the third largest bank in Saudi Arabia of which RBS will own approximately 5 per cent, meaning that it will only need to hold just under £1bn to cover that risk.

This news will mean that investors will look more favourably upon RBS, helping the government sell down its stake at the smallest possible loss to UK taxpayers.

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