Islamic bank mergers and acquisitions in the GCC region are likely to increase as many banks still lack the market position needed to compete with large established peers, particularly in overbanked markets such as the UAE, according to Fitch Ratings.
Consolidation should ultimately be positive for the Islamic banking sector by creating larger, stronger and more efficient Islamic banks, the ratings agency said in a new research note.
It said GCC Islamic banking M&A is driven by the search for competitive advantage to access growth opportunities and build low-cost deposits, as well as by cost synergies.
Deals usually need government backing given the significant stakes that governments hold in most banks.
Fitch noted that most Islamic bank M&A is between Islamic banks or involve a conventional bank acquiring an Islamic bank as a subsidiary, adding that Islamic banks cannot easily acquire conventional banks.
Islamic banking has been a growth area for the last 10 years with most GCC countries trying to build their Islamic financing capabilities and create domestic Islamic finance hubs. Accessibility to Islamic products and instruments has grown rapidly with product innovation.
However, in an overbanked region, some of the newer franchises have struggled to find good growth opportunities and to attract cheap and stable deposits, given the strength of existing competition, Fitch said.
It added that they have also been hindered by the ability of conventional banks in some countries to offer Islamic financing and take Islamic deposits.
Kuwait Finance House's aim to acquire Bahrain's Ahli United Bank and its Islamic franchise in Kuwait, if achieved, would make Kuwait Finance House the leading domestic Islamic bank in Kuwait and a big Islamic player in the region.
In the UAE, Dubai Islamic Bank and Noor Bank are likely to merge, which would create a more sophisticated leading Islamic player, benefiting particularly from cost efficiencies and product and business development, the research said.
It added that while many Islamic banks still lack a competitive market position, some strong Islamic franchises do exist. In Saudi Arabia, Al Rajhi Banking and Investment Corporation, the largest bank in the kingdom with a 17 percent market share of domestic credit, is also the world's largest Islamic lender, with total Islamic financing assets of $97 billion at end-2018.
Saudi Arabia's second-largest bank, National Commercial Bank, is another example of a strong Islamic franchise. It is pursuing a merger with a conventional bank, Riyad Bank, although it may have to abandon its plan to fully convert to an Islamic bank if the merger proceeds, Fitch noted.
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