HSBC will hold 51 percent of the group, to be named HSBC Bank Oman SOAG. OIB is Oman's fifth-largest bank, with the second-largest branch network in the country and gross assets of $3.2 billion.
It is rare to get the opportunity to create a bank of such scale in a key target market, Simon Cooper, chief executive of HSBC Middle East and North Africa, told a conference call for reporters.
The ability to grow organically in Oman is there, but it would take an awfully long time to get to the scale of Oman International Bank. I am not predicting job losses.
Under the terms of the merger, HSBC will inject additional capital of up to $97.4 million from internal resources into HSBC Oman, after which the lender's local business will be merged with OIB.
HSBC will have management and board control of the new entity, but it will remain listed on the Oman bourse, said Cooper. He declined to say whether the present chief executive of OIB would hold the same position in the new bank.
OIB has a market capitalisation of around $700 million, according to Thomson Reuters data.
The deal is expected to complete in the second quarter, following regulatory and other approvals. Oman's central bank approved the planned merger in March.
Investors say the deal will benefit OIB.
OIB had a gradual decline in lending, but with HSBC coming on board they can reverse the trend, said Vickneswaran Gowribalan, an Oman-based portfolio manager.
From an investor point of view, it's good because OIB can get more aggressive, in terms of non-interest income. Also, with Islamic banking licences now being issued, OIB can tap into the Islamic banking market with HSBC's Amana expertise.
Oman opened its doors to Islamic banking last May and let conventional lenders run sharia-compliant operations.
HSBC is pulling back from countries where it is unprofitable or lacks scale, and restructuring operations elsewhere, and has been reviewing its Middle Eastern operations.
Its reorganisation affects Oman, Bahrain, Jordan, Lebanon, Qatar and the UAE.
Shares in OIB are down 0.9 percent this year, after ending 2011 nearly 7 percent higher.
(Additional reporting by Steve Slater in London and Nadia Saleem in Dubai; Writing by Rachna Uppal; Editing by David Hulmes)