The case for consolidation in the UAE's banking sector

If two of the UAE’s largest banks can see the benefits in merging, why are the smaller institutions so reluctant, asks Courtney Trenwith
The case for consolidation in the UAE's banking sector
By Courtney Trenwith
Sat 25 Jun 2016 12:36 AM

First the international banks started to pack up or consolidate their services in the UAE. Now local banks are also evaluating mergers.

The news that National Bank of Abu Dhabi (NBAD) and FGB, the largest and third largest banks in the emirate by assets, are formally studying a tie-up was unsurprising in an overcrowded market learning to let go of its relative dependence on government deposits. The surprising point is that the first local banks to consider consolidation since 2007 are two of the largest.

So if two solid financial institutions, both backed by the government or the Abu Dhabi royal family and both with very healthy capital ratios, believe it could be more beneficial to merge than to continue operating single-handedly, then why are the smaller firms so reluctant?

With more than 50 financial institutions for a population of less than 10 million, the UAE is smothered in both local and international firms. Ambitions in Dubai, and now also Abu Dhabi, to become global financial capitals and the country’s rapid economic elevation in the past 30 years have magnetised financial institutions the world over.

Private banks also sprung up across the country as businessmen attempted to gain a foothold in the booming economy.

But times are a lot tougher now and the market has become so tight there is little breathing room. The word ‘consolidation’ has been murmured for years - I have not met a banker or banking CEO in the country who does not think consolidation is required - but international banks, whose offshore executives are arguably less clouded by attachment to their UAE operations, have so far been the only institutions willing to act.

Indeed, Michael Tomalin, one of the UAE’s most successful bankers ever and the CEO of NBAD for 14 years, told me in an interview when he retired in 2013 that the UAE banking market had become jam-packed.

The man who in 14 years took NBAD’s revenues from $200m to $2bn, warned three years ago that competitors were snapping at the bank’s heels – and that was prior to any collapse in oil prices.

In the first quarter of this year, NBAD, strong in wholesale banking operations, reported a 10.7 percent year-on-year fall in net profit to $350m. FGB, which is strong in consumer lending, reported a 6 percent fall to $360m during the same three-month period.

The UAE is not alone. Central banks in Qatar and Bahrain, which also have heavy financial markets, have said they expect mergers to take place. But there too, there is reluctance.

In March, Qatar’s Ahli Bank denied it was involved in discussions over a merger with International Bank of Qatar and Al Khalij Commercial Bank. The trio’s assets together would be worth more than $30bn, according to Reuters. That would still only elevate them to the country’s third or fourth largest lender, such is their current status.

Central Bank of Bahrain Governor Rasheed Al Maraj last renewed his call to Bahraini Islamic banks to merge or acquire other institutions in December. He emphasised the need was particularly acute for Islamic investment banks in the kingdom, of which there are many but none of a sizable nature.

Across the GCC, the significantly reduced government oil deposits has seen liquidity drying up. That has forced banks to cap lending, causing all sorts of difficulties for businesses, especially start-ups – the very ventures that the region needs to move ahead.

A merger between NBAD and FGB could create a regional powerhouse with $170bn in assets, more than the current leader, Qatar National Bank. Arqaam Capital says it would also help to diversify each banks’ operations, provide funding advantages and cost optimisation.

So, again, if two of the country’s largest banks believe it may be better to join forces, then what are the smaller institutions waiting for? In the interests of the country’s entire banking sector they would do well to re-evaluate their individual futures.

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