UAE banking mergers 'positive' for future of sector

Consolidation among UAE-based banks is continuing as the country looks to reshape its economy and consolidate state-owned companies to deal with lower oil prices, according to a new research note.

Indosuez Wealth Management’s Credit Pulse report follows news that three Abu Dhabi banks - Abu Dhabi Commercial Bank, Union National Bank, and Al Hilal Bank - were in possible merger talks while three Sharjah banks - Bank of Sharjah, Invest Bank, and United Arab Bank - publicly denied media reports of another three-way merger.

Senior credit analyst Aabid Hanif said: "Taking into account the UAE market, the consolidation trend is fundamentally positive and will improve banks’ franchises through increased pricing power as well lowering funding costs for banks.

"However, existing weaknesses, namely sizeable single name and sector concentrations, high levels of related-party lending, and asset-quality issues are still characteristics of banking in the Middle East and remain key features for creditors to look out for."

The research note said that the UAE banking system is arguably over-banked with approximately 50 banks operating in a country with a population of 9 million.

It added that lower economic and credit growth has increased competition for lending opportunities as the pool of high quality customers and deposit sources shrinks. Both these dynamics have put pressure on UAE banks’ net interest margins which have trended downwards, supporting the case for mergers.

Hanif said consolidation has been an ongoing theme over the past 2-3 years for GCC banks, particularly among state-owned enterprises, as the Abu Dhabi authorities continue to reshape their economy due to lower oil prices.

The merger of First Gulf Bank and National Bank of Abu Dhabi in 2017 created the UAE’s largest bank, First Abu Dhabi Bank, with $188 billion in assets.

The potential merger between Abu Dhabi Commercial Bank, Union National Bank, and Al Hilal Bank will create an entity with approximately $113 billion of assets, making it the fifth largest lender in the GCC and third biggest in the UAE, he noted.

"The benefits of potential mergers among banks in the UAE and GCC are clear – pricing power, less pressure on funding costs, increasing banks’ scale and revenue base. However, sizeable single name and sector concentrations as well as high levels of related-party lending will continue to constrain many banks stand-alone credit profiles," added Hanif.