M&A activity could spiral in Dubai banking sector

The merger of NBD and EBI could spark a rush for smaller banks to consolidate or face crippling competition.
M&A activity could spiral in Dubai banking sector
By Reuters
Wed 07 Mar 2007 12:38 PM

Dubai's stock exchange halted trading in Emirates Bank International and National Bank of Dubai on Wednesday until they shed light on a surprise merger plan to create the largest Gulf Arab lender by assets.

The two banks, which had never said they were in talks, will merge at the behest of Dubai's ruler to form a lender large enough to meet the demands of a rapidly growing economy, Emirates Bank said on Tuesday.

The news raised expectations that more mergers would follow in a region where economic growth has surged on a tripling of oil prices in the five years to July, driving demand for bank credit.

National Bank, the smaller of the two, was more cautious than Emirates Bank in its first comments on the plan, saying it was premature to give details and that any deal would have to be approved by its shareholders.

The government of Dubai, part of the United Arab Emirates federation, owns 76 percent of Emirates Bank and 14 percent of National Bank.

Majority shareholders of National Bank, Dubai's fourth-largest by market value, would have little choice but to acquiesce to a deal blessed by the emirate's ruler, Sheikh Mohammed bin Rashid al-Maktoum, Standard & Poors' credit analyst Anouar Hassoune said.

"That is why Emirates Bank is confident," he said.

Standard and Poor's raised its outlook on the ratings of both banks to positive from stable, saying the new entity, with $45 billion in assets, would have "strong financial performance, sound liquidity, and a well-diversified funding mix."

Analysts had expected both stocks to rally on Wednesday after news of the merger after the close on Tuesday. The Dubai exchange suspended trading in the banks until they announce details of the plan.

"Once the market ... is satisfied then we will resume trading in the stocks," Dubai Financial Market Chairman Essa Kazim told Reuters.National Bank of Dubai said it was too early to talk of details of the merger process.

The banks "are at an early stage of a transaction that could lead to the establishment of a merged entity subject to shareholder approval," National Bank Chief Executive Douglas Dowie said in a letter to the Securities and Commodities Authority, the market regulator.

The two banks, which first attempted a merger in 1999, were still working on details of the deal including how to "align share prices", Emirates Bank said on Tuesday.

The new entity would have a market capitalisation of $12.03 billion at Tuesday's closing prices, surpassing the country's largest lender, National Bank of Abu Dhabi, in both assets and value. Its assets will trump the $42.7 billion which Saudi Arabia's National Commercial Bank, the Gulf's largest lender, had at the end of last year.

"The merger will be viewed in a positive light," Mohammed Yasin, managing director of Emirates Securities, said of the stock price reaction expected when trading resumes.

"Dubai needs to create a strong entity to defend market share and sustain growth against foreign competition."

The UAE is negotiating trade deals with the European Union and the United States, that could give foreign banks easier access to the second-largest Arab economy.

Economic growth, estimated by Standard Chartered at more than 10 percent last year, is driving a surge in bank lending. Mortgage lending by UAE banks jumped almost 80 percent in the year to Sept. 30, the latest central bank data showed.

"It is a reaction to the growth in the economy and the large projects that local banks were in less of a position to take on," said Mark Young, managing director at Fitch Ratings.

"The fact that this bank will potentially be the largest in the region means the competition will have to react. Consolidation will become the buzzword."

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