The birth of the banking titans

A quick stroll down Bank Street in Dubai (formally known as Khalid Bin Waleed Street) and, despite the hustle and bustle of everyday activity, and the infamous traffic, it is hard to avoid seeing bank signs every other step. This is one of the few places in the world where you will find an Iranian bank next door to Citibank, along with the UAE-based banks, from the known (Mashreq, First Gulf Bank) to the more obscure (National Bank of Umm Al Quwain). At first glance the many banks give consumers the illusion of choice, but the fact is that small banks are unattractive (less stable, fewer ATMs and branches) and most flock to the giants. This is why in the UAE the top five banks are worth twice as much as the combined market cap of the next fifteen finance houses.

"We have too many banks, too many local banks. We are also over-banked by foreign banks," said Abdullah Mohamed Saleh, chairman of National Bank of Dubai (NBD), during a press conference last week. He was there along with HE Ahmed Humaid Al Tayer, chairman of Emirates Bank International, to announce the terms of the merger between the two Dubai-based institutions. The new entity will be the largest bank in the UAE (by market cap), and the largest in the GCC (by assets).

Saleh explained the underlying rationale: "The banks in the UAE are small and the challenges are growing every day. There are more challenges, and more competition from foreign giants... We need this amalgamation, we need this consolidation, and we hope others will follow our example." The mega projects and the economic boom in the region have created the demand for financial institutions capable of servicing the growth.

"It is a good beginning, and you are going to see some of the other countries in the region go through consolidation in the banking sector." So predicts Dr John Sfakianakis, the group chief economist at Saudi Arabian British Bank (SABB). He sees this is as an inevitable trend. "Banking consolidation is lagging behind the positive economic growth we have, and as it continues we will see more [mergers]... In the next five years there will only be a few mega banks in the region."

While there has been an influx of international banks into the region, Sfakianakis views them as filling a void that the smaller banks in Saudi Arabia have ignored, most importantly the inability of the smaller banks to finance mega-projects.

This dynamic will change, he agrees: "The size of the projects is so big they force the banking sector to think about how they can cater to these projects. Any market that operates freely have to create banks that cater to infrastructure projects."

The path to creating large banks is predictable. In addition to mergers, "local banks will naturally grow with the economic boom over the next five years; smaller banks will be bought out by larger banks... Banks need to become aggressive in acquisitions."

Two obstacles stand in the way of acquisitions. The first is regulatory, and the second is the quality of some smaller banks. Sfakianakis says: "The regulatory framework has to be looked at because there hasn't been a trend [of acquisitions]. The private sector in the region consistently outpaces regulations, and the framework has to adjust at the same pace."

Governments in the region have been active on this front, and increased liberalisation and sophistication are on the agenda of all economic ministries, not only in the GCC, but in the rest of the Arab world.