The Gulf merger wave: What's next for the banks in the region?

Abu Dhabi's three-way bank merger is set to create a $114bn financial giant
The Gulf merger wave: What's next for the banks in the region?
Moody’s Investors Service said mergers will ensure that the banking sector would benefit through synergies and increased pricing power
By Bernd Debusmann Jr
Thu 31 Jan 2019 07:59 AM

Last week, Abu Dhabi Commercial Bank (ADCB) agreed to merge with Union National Bank (UNB) and Al Hilal Bank, potentially creating the Gulf’s fifth biggest lender with about $114bn in assets.

According to a statement, ADCB offered 0.5966 shares for every UNB share. The combined ADCB entity will then issue a mandatory convertible note to buy Al Hilal – which is privately held – for approximately $272m in a deal that is expected to close in the first half of this year.

Since merger talks were confirmed in early September, ADCB shares have risen by 26 percent, while UNB – which announced last Monday that its CEO is retiring – saw shares go up by 37 percent. According to media reports, the combination is expected to deliver cost synergies of about $167m annually on a run rate basis.

Banking on consolidation

The recent announcement follows an earlier 2017 tie-up between Abu Dhabi’s two largest banks, First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD), to create First Abu Dhabi Bank (FAB).

According to a recent report from Moody’s Investors Service, the recent wave of M&A announcements is partly a reflection of what it termed an “overcrowded” GCC banking sector.

The report noted that there are nearly 50 banks servicing a UAE population of about 9 million. In neighbouring Saudi Arabia, 28 lenders cater to over 30 million.

“Slow growth and subdued credit demand in the region is one of the biggest drivers of consolidation,” said Ashraf Madani, Vice President and Senior Analyst at Moody’s. “This has intensified competition for depositors and borrowers, dampening profits at GCC banks.”

Additionally, the report noted that consolidation in the GCC banking sector will benefit banks by increasing their pricing power when competing for deposits, as deposit growth remains sluggish and concentrated among several – but few – large depositors dominating the market.

“In most GCC banking systems, the government is the largest depositor and together with related government bodies and service providers, in some countries contributes half of total deposits,” the report noted. “As oil prices declined in 2014, some governments tapped into their deposits to fund their deficits, creating funding shortages for the banks.”

As a response, banks started to increase deposit rates to attract more deposits.

The report also noted that mergers will help create cost efficiencies by removing duplication in certain functions which benefit the banks’ overall profitability, as in the past, competition has been forced to reduce lending rates, particularly for large corporates.

“This has in some cases led to risk mispricing and dampening bank profitability,” the report added.

Moves in Saudi Arabia

Last week’s mergers announcement in Abu Dhabi also comes at a time in which similar moves are being made in Saudi Arabia.

In December, National Commercial Bank (NCB) and Riyad Bank announces that their respective boards of directors approved the commencement of merger discussions, while two months earlier Saudi British Bank and Alawwal Bank – the kingdom’s oldest – signed a binding merger agreement that will soon lead to the creation of Saudi Arabia’s third largest bank.

In a recent interview with Arabian Business, Alawwal managing director Soren Nikolajsen confirmed that the SABB-Alawwal merger is on track to be completed in the first half of 2019, with the two banks currently approaching the phase of the merger in which they go through the necessary regulatory approvals and hold an extraordinary general meeting (EGM) for shareholders to approve.

“We expect to complete [the merger],” he explained. “We expect that the day in which the two [legally] become one bank should happen in the first half of the year.”

Once SABB and Alawwal combine, the bank will also be the second largest corporate bank in the kingdom based on combined assets, he added.

“We aim to create the best bank in the kingdom across the whole range of customer segments,” he said.

“Both banks today are reasonably similar. They are traditional corporate banks and the majority of the balance has been focused on the corporate size [but] both are making an effort to increase their retail banking.”

Kuwait and Bahrain

Last week, Kuwait Financial House and Bahrain’s Ahli United Bank’s boards met to consider valuation reports on a potential merger that would lead to the creation of the sixth biggest lender in the GCC, with $92bn in assets.

The meetings follow a July announcement that the two had restarted discussions on a potential merger after initial talks fell apart over disputes over price, according to anonymous sources quoted by Bloomberg.

Wave of the future

In the short-term, analysts predict that further bank consolidation is likely across the region as GCC economic growth remains subpar, even if data shows improvements from previous years.

“Nevertheless, we expect market participants will need to see successful execution of the currently planned mergers,” Madani said.

“There are encouraging signs as evident in the increase in potential M&A activity that shareholders are coming to realize that mergers can create value for them in the long-run.”

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