It may seem unlikely, but a Saudi Arabian bank merger announced Wednesday means Royal Bank of Scotland (RBS) could be one step closer to returning to private ownership.

The proposed merger of HSBC-backed Saudi British Bank (Sabb) and Alawwal would allow RBS, which was bailed out by the taxpayer during the financial crisis and is still 70 per cent owned by the UK government, to massively sell down its stake in Saudi-based Alawwal.

News of the $5bn deal – which many expected would be priced lower, since RBS was likely to be a keen seller – caused Alawwal’s shares to surge the maximum 10 per cent on the open in Riyadh.

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“Discussions are now at an advanced stage, [but] any binding agreement to proceed with a merger will still be subject to a number of conditions, including shareholder and regulatory approvals,” said Alawwal in a statement.

RBS, as part of a consortium including Santander and Fortis, grabbed 40 per cent of Alawwal when it acquired ABN Amro in 2007.

Although RBS itself only owned 15 per cent of the Saudi Arabian bank, it held all of the consortium’s risk-weighted assets on its balance sheet. This meant it had to hold £5.9bn on its balance sheet to cover Alawwal if it went insolvent.

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Following the Sabb-Alawwal deal, which will create the third largest bank in Saudi Arabia, RBS will now own around five per cent of the newly merged entity – meaning it will only have to hold just under £1bn to cover that risk.

The move has boosted RBS’s common equity tier one (CET1) ratio, a sign of the bank’s strength, by 0.4 percentage points.

The UK chancellor Philip Hammond has been looking to sell the government’s stake in RBS, but has indicated he is waiting for the bank to resume dividends and for its share price to lift to minimise the loss to the taxpayer.

Earlier this month, RBS finalised a penalty with the US Department of Justice which was a major step in this process.

Read more: RBS’s return to profit welcome but will taxpayers ever see their £45bn?

Full story: RBS another step closer to privatisation after Saudi bank merger: City A.M.