Deal could spur mergers of other banks including Union National Bank and Abu Dhabi Commercial Bank
Abu Dhabi banking shares climbed 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.
Egypt's index edged up following comments by central bank governor about possible further currency devaluation.
Shares in NBAD jumped 4 percent to 10.05 dirhams while FGB gained 2 percent to 12.85 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, but several analysts said investors' general optimism towards the merged entity meant selling of FGB shares might remain 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 research at Dubai's Arqaam Capital said synergies should be very "substantial" from a cost reduction, product suite expansions and revenue sharing perspective, making the deal attractive for shareholders of both lenders.
Analysts at Arqaam Capital expect the deal to contribute positively to the earning per share of both banks, with FGB potentially seeing a 15.9 percent rise and NBAD an 11.1 percent increase.
Arqaam also said the swap ratio of 1.254 for 1 still slightly undervalued NBAD and overvalued FGB in the deal and it had reduced its target price for NBAD to 12.50 dirhams from 13.00 but increased it for FGB to 15.64 dirhams from 15.00 dirhams.
But combining the two behemoth banks will be met with challenges both in terms of merging finances and operations and in combining cultures and different people.
"There are practical challenges which can only be addressed with a combination of flexible planning and relentless execution. Even then, the benefits can appear later than hoped for," said David Tusa, managing director at consultant firm Alvarez & Marsal, adding that often the human capital side gets much less attention than it deserves, and in these cases, "disappointment quickly sets in".
The deal could spur mergers of other banks including Union National Bank and Abu Dhabi Commercial Bank. Shares in UNB surged 5.9 percent and ADCB's jumped 3.8 percent.
The main index advanced 1.2 percent.
In Dubai, the benchmark was up 0.2 percent with most activity concentrated in second- and third-tier stocks. Islamic insurer Dar Al Takaful jumped 15 percent, it daily limit.
Egypt's central bank governor signals further devaluation in the coming future
In an interview with three local papers over the weekend Egypt's central bank governor, Tarek Amer, said there was "no defined target for the Egyptian pound/USD exchange rate" and strongly alluded to the prospect of further devaluation in the coming future - without setting absolute deadlines - adding that maintaining a fixed exchange rate against the dollar over the last five years was a "mistake that cost the state billions of dollars" and said he is willing to take the necessary measures to correct the currency shortfalls.
Investors reacted positively, with tourist and export related stocks outperforming Cairo's main index which was up 0.6 percent. Arabia Cotton Ginning, a textile exporter, rose 2.9 percent and Egyptian Resort jumped 4.4 percent.
In Doha, the index gained 0.4 percent, lifted by blue chips. Qatar National Bank, currently the largest listed lender in the Gulf region, added 1.4 percent.
Saudi Arabia's market is closed throughout this week for Eid Al Fitr holidays.