UAE banking merger could be just the start

First Gulf Bank and National Bank of Abu Dhabi has created the largest financial institution in the country


The UAE has a new banking giant. The merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), which came into effect late on March 30, has created the biggest financial entity in the country, with about $183bn worth of assets — one-quarter of the entire sector.

The new bank, which will use the NBAD branding, is expected to wield greater influence in the market, compete more aggressively against foreign banks and potentially expand internationally. It may also spur further consolidation in the country’s banking industry, analysts say.

“The NBAD-FGB merger is a good thing for the UAE banking sector as a whole,” says Alyssa Grzelak, Middle East and North Africa banking risk economist for US-based consultancy IHS.

“A larger size bank is capable of creating new opportunities that can influence the market in a positive way. It will be able, for example, to provide larger loans for investments that will support the economy.”

FGB shares finished trading on March 30 and the company will be dissolved. At the opening of trade on the Abu Dhabi Stock Exchange on April 2, FGB investors will receive 1.254 NBAD shares for each FGB share they hold. FGB shareholders will own about 52 percent of the newly combined bank, while existing NBAD shareholders will account for 48 percent.

The Abu Dhabi government and state-owned entities will own about 37 percent of the merged entity.

FGB shareholders will own approximately 52 percent of the combined bank.

The merged entity also could have the significant impact of increasing its weighting on the MSCI Emerging Markets Index. Dubai-based equity strategist at EFG Hermes, Mohamad Al Hajj, told Bloomberg that once a liquidity factor adjustment is removed, the new bank’s MSCI weighting could rise to 0.18 percent, compared with the banks’ combined 0.1 percent immediately after the merger.

“Looking ahead and assuming that FGB’s liquidity moves to the new entity, we expect the merged entity to pass liquidity requirements next year,” Al Hajj said.

An MSCI review of the stock’s allocation in its emerging-markets index next year could trigger $240m of passive inflows from tracker funds, he said.

In a letter to customers on March 29, FGB group head of personal banking Hana Al Rostamani said the merged bank would “create a uniquely strong financial institution that will support the region’s continued growth”. “Joining together on or around April 1, we will be combining our strengths and capabilities, expanding our resources and global reach to establish the UAE’s largest bank with $183bn in assets,” Al Rostamani wrote.

“Our new bank will have one guiding purpose and focus — to support your ambitions to grow stronger. We remain committed to putting our customers first and at the heart of everything we do.”

EFG-Hermes banking analyst Shabbir Malik says the merger will give the bigger NBAD added impetus during an economic slowdown.

“The merger brings together FGB’s dynamism and NBAD’s solid culture. It also makes sense to reduce competition in a quite crowded marketplace,” he says.

Malik expects NBAD will eventually expand internationally, following in the footsteps of the region’s largest financial institution, Qatar National Bank (QNB).

The merger will create the UAE’s biggest lender, with a 27 percent share of the country's banking sector.

“There will be a long process of integrating and creating synergies between the systems of both banks. Once this process is done we can expect new areas of focus. I expect that when the bank will reveal its new strategic outlook at the beginning of the second quarter some of these new regional ambitions will be formulated,” Malik says.

Grzelak says both NBAD and the former FGB were already expanding their activities in markets across the GCC, Asia and North Africa.

“I expect them to accelerate these activities, being the second largest bank in the GCC. Now with the bigger footprint that the new NBAD will have, I expect them to be able to expand at a much larger and more aggressive pace,” she says.

Raghu Mandalogathur, the head of research at asset management company Kuwait Financial Centre, predicts NBAD will extend even further afield.

“It will be a regional behemoth, only second to Qatar National Bank. With significant assets in the kitty, I see the bank playing a larger role in international banking, with focus on Europe, Americas, and Asia,” he says.

At home, though, NBAD will have greater influence on the UAE market, potentially increase its market share even further and funding investments that other lenders simply do not have the backbone to support.

“Its size will give NBAD even better brand recognition, and allow for faster and cheaper deposit mobilisation,” Grzelak says. “Being such a large player, their influence on pricing will grow. Lower costs should give the new NBAD a better competitive position in the market and allow them to compete more aggressively with Western banks on wholesale deals and for investment fees.”

The merger is only the third among banks in UAE history, with the others being National Bank of Dubai and Emirates Bank International’s amalgamation to create Emirates NBD in 2007, and Dubai Bank and Emirates Islamic Bank’s merger to form Emirates Islamic Bank in 2012.

But there are likely to be more. With nearly 50 banks competing in a market with barely 9 million people, analysts have long argued the sector needs more consolidation. By comparison, Saudi Arabia has 25 banks serving a population of almost 33 million, while Australia has four big banks for its 23 million people.

The economic slowdown in the past two years, triggered by lower oil prices, has emphasised the need for consolidation.

BMI Research warned in January that GCC banks were facing their toughest conditions since the global financial crisis this year, with the combination of lower oil prices, reduction in capital expenditure and increased drawdowns in government deposits squeezing liquidity and weighing on lending opportunities.

The slowdown would likely be sustained over the next five years, the research firm said.

The most significant contributing factor is the rapid transition of Gulf sovereigns’ position as “net creditors to net debtors”. Government deposits in the UAE and Saudi Arabia had fallen by 17 percent and 8.5 percent, respectively, since the start of 2015, BMI Research said.

Hana Al Rostamani, group head of personal banking at First Gulf Bank.

The enduring difficult conditions may eventually be the catalyst for greater consolidation in the UAE banking sector. There have been reports of merger talks between Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB), and Abu Dhabi Islamic Bank and Al Hilal Bank, but none of the institutions have publicly confirmed their interest in an amalgamation.

That is despite the fact NBAD and FGB, Abu Dhabi’s largest and third-largest lenders by assets, respectively, were already two of the UAE’s most prominent banks before their merger. They evaluated that NBAD, strong in wholesale banking operations, and FGB, strong in consumer lending, would be a better force together.

Foreign banks, including Royal Bank of Scotland (RBS), Lloyds, Barclays and Standard Chartered, also have consolidated their operations in the UAE amid the crowded market.

In Qatar, where 15 banks serve 2.3 million people, Masraf Al Rayan, Barwa Bank and International Bank of Qatar (IBQ)  are reportedly in talks to form the country’s largest Sharia-compliant bank and the third-largest such lender in the Middle East.

Mandalogathur says economic realities may eventually force banks to tie-up.

“There is an ongoing pressure from rising funding costs and a rise in impairment charges driven by the continued economic slowdown,” he says. “A lot depends on the stability of the oil price, and the success of the OPEC producers in their quest to constrain the supply glut.”

Nigel Sillitoe, founder and CEO of Dubai-based consultancy firm Insight Discovery, says the UAE is “over-banked” and it is only a matter of time until there are more mergers.

The new NBAD will drive further investment and economic diversification for the UAE.

“I expect them to be with Abu Dhabi based banks; the balance sheets of banks here in Dubai are a bit stronger,” he says.

But Malik argues another bank merger is some time away, yet.

“History suggests that these kinds of mergers usually take quite a bit of time. Key investors that have stakes in other UAE banks would first like to see the NBAD-FGB merging process to be completed before even considering another merger,” he says.

The new NBAD is expected to continue reporting solid financial results. In 2016, both NBAD and FGB announced significant profits of $1.4bn and $1.6bn, respectively. It was FGB’s highest profit in 17 years, despite an 11 percent fall in net profit for the fourth quarter. NBAD reported a 28 percent profit jump for the three months to December 31. Both banks reported about 2 percent growth in revenues, despite economic challenges amid lower oil prices. Combined results will begin to be reported from the second quarter of 2017.

Investors and the market will be keenly watching the new NBAD to not only witness how it handles its new prowess but to judge whether the bold decision to merge is one they should follow.

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