Candidates for consolidation

The region's banking sector is facing up to the biggest shake-up it has ever witnessed during its tender 50-year history, with experts suggesting that close to 100 banks could be whittled down to as few as 10 mega banks between now and 2010. And we can't wait to see what happens. Over the next three pages Arabian Business, with the help of some of the Middle East's top financial pundits, predicts which institutions are the next candidates for consolidation, leading the region's banking sector into its next phase of growth and development in order to compete with - or even takeover - the globe's monetary monsters.

United Arab Emirates
Number of banks: 46 (21 local, 25 international).

The Emirates will see the most banking consolidation in the Gulf. Hassan Heikal, CEO of the region's leading homegrown investment bank, brokerage and asset management firm EFG-Hermes, told Arabian Business that in two to three years time the number of banks in the UAE, and potentially the GCC, would be reduced from 46 to 10 mega banks. Because the UAE is split into seven emirates we have focused on the two largest markets where the majority of the consolidation battle will take place.

Abu Dhabi
What's on the cards? A major deal between two of the UAE capital's largest banks is rumoured to be taking place in order to match Dubai's recent Emirates Bank International/National Bank of Dubai merger. One analyst told Arabian Business that if a merger was to take place in Abu Dhabi and then it would at the very least "have to match Dubai".

"The National Bank of Abu Dhabi (NBAD) has said it is restructuring its business to prepare for consolidation in the industry and has appointed consultancy firm McKinsey to advise it," the analyst continued.

"I can only see it merging with two possible banks, Abu Dhabi Commercial Bank (ADCB) or the Abu Dhabi Islamic Bank (ADIB). The latter seems unlikely as they would want to surpass Dubai, not match it," he added.

Ziad Al Dabbas, head of NBAD's domestic capital markets group said that most of the big banks in the UAE were serious about mergers.

"In general, due to the developments in the banking sector of the UAE and the presence of foreign banks, all national banks, especially the big ones, are restructuring or preparing."

"Banks are serious on the subject of mergers. They are no longer traditional but want to offer what is comprehensive banking," he added.

Merger motives: a NBAD/ADCB merger seems the most likely. If this was to take place the joint market capitalisation of the merged bank (around US$16.5bn) would easily surpass Dubai's newly formed Emirates NBD (US$12.2bn including synergies) by US$4.3bn.

Then again, if the NBAD's board views the Islamic route as more favourable, it could head for the smaller ADIB.

However, this plan seems far less likely as a joint market cap would still only reach around US$11bn.

Bonding barriers: the obstacles are minimal. With both banks majority owned by the country's government, as in the EMI/NBD merger, any deal could go through relatively smoothly.

What are the odds in 2007?
9/10
NBAD's chief operating officer, Abdullah Salah Abdul Rahim has said that McKinsey will look into details and advise the bank, but that they "need to challenge us". If it's a challenge he wants an ambitious merger between the two largest players could happen before the end of the year.

Dubai
What's on the cards? With the Gulf's and Dubai's biggest banking merger signed and sealed, analysts are divided. Some say the next Dubai consolidation could happen, at the earliest, in 2008, while others have said that they should act now and ride the merger wave while its hot. Dubai's two largest (with the exception of the newly formed Emirates NBD) players lie in wait, either to merge with another bank or head out on the acquisition trail. In terms of size the second largest Dubai bank (lying in 12th place overall in the top 25 GCC banks by market cap) is Dubai Islamic Bank (DIB) with a US$8.1bn market cap, followed by the recently rebranded Mashreq (US$6bn).

Merger motives: DIB has the unique distinction of being the world's first fully-fledged Islamic bank. Since its formation in 1975, DIB has established itself as the undisputed leader in its field in the emirate and with Islamic banking now one of the world's fastest-growing economic sectors, comprising of 200 institutions responsible for assets estimated at more than US$200bn, it is likely to be on the acquisition trail in the near future.