Shares in NBAD jumped 5.6% while FGB gained 4%
Abu Dhabi banking shares climbed in early trade on Sunday after the boards of directors of First Gulf Bank and National Bank of Abu Dhabi approved a proposed merger of the banks, aiming to complete it in the first quarter of 2017.
Shares in NBAD jumped 5.6 percent to 10.20 dirhams while FGB gained 4.0 percent to 13.10 dirhams. They were the market's two most heavily traded stocks.
The merger would be completed via a share swap which would result in shareholders of FGB receiving 1.254 new NBAD shares for every one FGB share. That ratio appears to favour NBAD holders greatly, but several analysts said investors' general optimism towards the merged entity meant selling of FGB shares might remin minor.
"The initial reaction was a cheer because markets like the fact the merger is happening and it's a monumental size," said one regional banking equity analyst.
In the long run the efficiencies that will be achieved through cost-cutting and reduced competition will be positive not only for the lenders involved but for the sector as a whole, the analyst added.
Jaap Meijer, head of equity research at Dubai-based Arqaam Capital, said expected synergies were "substantial" in terms of lower funding costs, expansion of the banks' product ranges and cost reduction.
"Going into the deal we believe that NBAD is undervalued while FGB is slighly overvalued," he said, adding that the deal could spur mergers of other banks including Union National Bank and Abu Dhabi Commercial Bank.
Shares in UNB jumped 8.0 percent and ADCB was up 3.3 percent. The main Abu Dhabi index was up 1.7 percent.
In Dubai, the benchmark was up 0.2 percent with most activity concentrated in second- and third-tier stocks. Shuaa Capital gained 1.7 percent.
Doha's main index was flat with telecommunications operators among the top performers. Vodafone Qatar was up 0.8 percent.
Saudi Arabia's market is closed throughout this week for Eid Al Fitr holidays.