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Sat 29 Oct 2016 12:12 AM

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GCC bank mergers unlikely despite tougher market, says Fitch

Ratings agency says Bahrain's banking sector, and particularly its Islamic banking sector, is overbanked

GCC bank mergers unlikely despite tougher market, says Fitch

Merger and acquisition (M&A) activity among the Gulf banks is unlikely to increase despite a tougher operating environment across the region, according to Fitch Ratings.

The ratings agency said that even in cases where mergers appear to make sense, such as the planned merger of Bank Dhofar and Bank Sohar in Oman, negotiations can be protracted and difficult. The Omani banks called off the merger last week.

"We consider Bahrain's banking sector, and particularly its Islamic banking sector, to be overbanked. We think the entire banking sector would benefit from consolidation because many of the banks lack sufficient scale. Some M&A activity is taking place across Islamic banks, encouraged by the central bank, but no major consolidation appears to be on the cards," the agency said.

Fitch said banks across the region are facing some pressure on profitability and a tightening of liquidity, especially in countries where public sector deposits are being withdrawn from the banks to shore up government finances.

It added that the outlook for the long-term issuer default ratings in Oman and Saudi Arabia is negative, reflecting the sovereigns' weakened ability to support the banks, should the need arise, and deteriorating operating environments.

Fitch, which downgraded the standalone viability ratings of 11 GCC banks in 2016, said in a research note that it does not expect to see much consolidation among GCC banks despite the deterioration in operating conditions.

"The UAE may well be the exception to the rule, as weaker oil prices and a tougher operating environment begin to weigh on profitability and encourage banks to seek out synergistic cost savings," Fitch said, adding that competition among the UAE's 50 banks is "fierce".

The merger of First Gulf Bank and National Bank of Abu Dhabi, announced in July 2016, appears to be on track for completion, scheduled by Q1 2017. The merged entity will become Abu Dhabi's clear market leader, with a share of around 25 percent.

Fitch added that the small number of local banks operating in some countries, such as Saudi Arabia (12), Qatar and Kuwait (each with 11), limit competition and help support profitability at high levels, meaning there is little incentive to merge and cut costs.

To date, the majority of M&A transactions concluded among GCC banks have involved some form of rescue operation, with a stronger bank acquiring a weaker, or failed, bank, it said.

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