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Is bigger better for banks?
As the UAE begins to feel the bite of the global credit crisis, consolidation in the country's banking sector could finally be on the cards.
Mashreqbank, the country's largest private bank, is open to a merger as long as such a move is driven by economic rationale, the company's chairman said last week.
"As far as Mashreqbank is concerned a merger is an option if one plus one equals three. The decision to merge is an economic decision and not a political decision," said Abdul Aziz Al-Ghurair. "We are for any merger that is in the interest of the two merging institutions."
The news came one day after Hussain Al-Nowais, a board member of the Abu Dhabi Economic Development Council, revealed that the emirate is mulling mergers in its own banking sector.
"There are ideas being discussed, you will be hearing this soon," Al-Nowais told journalists on the sidelines of World Economic Forum meeting in Dubai.
The UAE has more than 50 banks, but they have had little impetus to merge - until now.
Central Bank governor Sultan bin Nasser Al Suwaidi last week told reporters that the bank would support any move that mitigates the impact of the credit crunch on the financial sector, including consolidation, but that it has not yet received any merger applications.
"If things continue the way we are seeing, with lack of liquidity and complete shutdown of the wholesale funding market, I think some banks will have to be bought out or consolidated. And without government support or bailout I don't think some of the banks have a choice now," says Faid Al Said, head of equities at ING Investment Management Middle East.
For a while, it looked like UAE banks, with their limited exposure to US subprime mortgage loans, were going to be spared from the global credit crunch. But as global debt markets seized up, money became a scarce commodity in an economy where developers are using significant amounts of debt to finance a slew of mega-projects.
The situation was exacerbated by billions of dollars in foreign investment leaving the country, as talk of de-pegging the dirham subsided.
In a bid to limit the impact of the credit crunch on the country's banks, the UAE central bank launched a $13.6bn emergency bank lending facility in September to provide liquidity to the sector.
The country poured $6.8bn into the financial system in October and has begun depositing another $6.8bn with local lenders, according to state news agency WAM. It has also said it will guarantee bank deposits at all banks operating in the country for the next three years.
The measures appear to have had some effect - on the Nov 11, the three-month Emirates Interbank Offer Rate (EIBOR) was down 0.32 percent from an intra-year high of 4.79 percent on Oct 30. Still, few believe the loan growth seen in recent years can be sustained.
"UAE banks have been growing at 40 percent to 50 percent per annum in the last two to three years and [this will] inevitably slow," Eirvin Knox, chief executive officer of Abu Dhabi Commercial Bank, told newswire Bloomberg last week.
"This would inevitably slow down as the global capital markets are in turmoil," he added.
His views were echoed by Ali Samir Al-Shihabi, chief executive of Dubai-based investment bank Rasmala Investments.
"It will be virtually impossible for developers to secure financing for new projects. Credit is expensive and difficult to get," Al-Shihabi told reporters at a press conference.
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