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GCC banks brace for new wave of mergers after ‘triple shock’ to profitability

Filed on March 14, 2021
Dubai Islamic Bank was the latest to join the M&A spree, when it fully acquired Noor Bank in January. — File photo

The second M&A wave could begin when the full impact of the weaker operating environment on banks becomes visible, Mohamed Damak, senior director at S&P Global Ratings said

The GCC banking sector is bracing for a second wave of mergers and acquisitions (M&A) after suffering a triple shock to profitability in 2020 from lower lending growth, lower-for-longer interest rates, and higher cost of risk, industry analysts said.

The second M&A wave could begin when the full impact of the weaker operating environment on banks becomes visible, Mohamed Damak, senior director at S&P Global Ratings said.

The first wave of M&A was driven by shareholders' desire to reorganise their assets, including the upcoming merger between The National Commercial Bank and Samba Financial Group. The deal will result in a combined entity with total assets of $213.12 billion, according to S&P Global Market Intelligence data, and it will create the third-largest bank in the GCC by assets.

“The second wave will be more opportunistic and spurred by economic rationale. The operating environment might push some banks to find a stronger shareholder or join forces with peers to enhance their resilience,” Damak wrote in S&P’s “GCC Banking Sector: A long climb to recovery”” report.

He said the new round of merger might involve consolidation across the different GCC countries or the different emirates in the UAE, for example. “However, it would require more aggressive moves by management than seen previously.”

The GCC banking sector has been undergoing a major consolidation phase with 20 banks negotiating mergers and acquisitions with an estimated $1 trillion worth of assets. The UAE had been leading the drive with the highest number of mergers both in terms of value and volume. In 2019, six mergers and acquisitions were being negotiated in the UAE worth $625.25 billion and two in Saudi Arabia worth $256 billion and one each in Kuwait and Oman.

In May 2019, Abu Dhabi Commercial Bank merged with Union National Bank in May and the new entity took over Al Hilal Bank as its Islamic arm. Dubai Islamic Bank was the latest to join the M&A spree, when it fully acquired Noor Bank in January. The merger of National Bank of Abu Dhabi and First Gulf Bank in 2017 to form UAE's largest bank, First Abu Dhabi Bank, and the merger of ADCB, Union National Bank and Al Hilal Bank, and SABB and Alawwal Bank in Saudi Arabia were also among the most significant M&A activities in the GCC banking sector in recent times.

"The twin challenges of the pandemic and protracted low oil prices will hit banks' profitability through slower credit growth, slimmer net interest margins and higher provisioning for bad loans. The revenue shock will shift management attention to cost discipline and consolidation opportunities. Mergers and acquisitions will remain a recurring credit theme over coming years," said Moody's analyst. "The banks now face larger cost adjustments as low oil prices and the coronavirus fallout constrain growth opportunities and severely dent their profitability," said Badis Shubailat, analyst at Moody's Investors Service. "This is prompting a new wave of mergers as banks seek ways to combat revenue pressure."

Benjamin Young, director at S&P Global Ratings, expects muted lending growth in all GCC countries except Qatar and Saudi Arabia.

In Saudi, mortgage lending continues to expand due to the authorities’ objective of increasing home ownership, while in Qatar government projects are boosting growth. Demand from corporates will likely improve only slightly, with some deferred 2020 capital expenditure and debt refinancing potentially occurring this year, said Young.

“We expect a deterioration of asset quality across the board, with non-performing loans increasing. This will not be helped by the lifting of regulatory forbearance measures, although we expect it to be progressive. We think that the measures implemented by most central banks in the region are supportive of liquidity but do not remove or reduce credit risk from the balance sheet of banks yet,” Young, said.

The S&P analyst said cost of risk would remain elevated following a jump of 60 per cent in 2020 as banks set aside provisions in preparation for more stress while banks' capitalisation will continue to support their creditworthiness in 2021, said Young.

issacjohn@khaleejtimes.com





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