GCC bank merger wave is ebbing

A wave of bank recent mergers that has swept across the GCC resulting in the creation of new banking mammoths and consolidation over the past 24 months is almost coming to an end, but a new cycle of acquisitions motivated by purely economic reasons might follow, S&P Global Ratings says.
In a report, S&P said on Monday that as the pool of banks with common major shareholders is shrinking, there would be fewer mergers and acquisitions from now on. The ratings agency believes the reason for the current wave of bank mergers and acquisitions in the region is the desire among banks with the same major shareholders to further enhance efficiency, strengthen franchises, and boost pricing power.
The ratings agency sees a few merger and acquisition opportunities in the UAE, particularly in Sharjah, Dubai, and Abu Dhabi. "However, any future M&A would require more aggressive moves by management than those seen in the past."
Over the past two years, there have been several mergers, including in the UAE a three-way combination of Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank to create a banking heavyweight with Dh423 billion.
Discussions are underway for a possible marriage between Abu Dhabi Islamic Bank (ADIB) with First Abu Dhabi Bank (FAB), a merger that would create combined assets of around $234 billion, and one of the Middle East's largest lenders, according to Bloomberg, despite denials from both parties of such deal happening. Fab itself was formed as a merger involving First Gulf Bank and National Bank of Abu Dhabi, and has total assets of around Dh744 billion.
While Emirates NBD, Dubai's largest bank is buying Turkey's Denizbank, elsewhere in the region Kuwait Finance House offered to buy Ahli United Bank. Dubai Islamic Bank, the UAE's biggest Islamic lender is considering acquiring Noor Bank, and reach $76 billion in total assets while Saudi British Bank is expected to complete by mid this year an agreement to buy Alawwal, 40 per cent owned by Royal Bank of Scotland Group to create $68 billion in combined assets.
Mohamed Damak, S&P Global Ratings credit analyst, said some market observers attribute the renewed interest in mergers by banks in the GCC to the less supportive economic conditions since second-half 2014, when oil prices started to drop. "We believe the reason is the desire to further enhance efficiency, strengthen franchises, and boost pricing power among banks with the same major shareholders. We see these operations akin to shareholders reorganising their assets rather than genuine mergers, although the economic benefits are clear and reportedly significant," said Damak.
S&P said that a new wave of acquisitions motivated by purely economic reasons could follow, but it may take longer to build than the current one given the added hurdles of convincing boards and shareholders, who face the possibility of seeing their assets diluted or losing control.
Data from Bloomberg shows that more than 20 Gulf financial institutions with total assets exceeding $1 trillion are in merger talks. "Given the overbanked nature of some GCC banking systems, we think that further consolidation could help improve banks' performance and financial stability. A new wave of acquisitions motivated by purely economic reasons could follow, but we think it may take longer to be realised," S&P said.
Analysts at the ratings agency believe that Gulf banks are generating healthy earnings, underpinned by low funding costs. "This performance is thanks to the significant amount of noninterest bearing deposits in the funding profile, high efficiency, and manageable cost of risk. Most banks have shown relative resilience despite the significant shift in their operating environment after economic growth slowed following the decline in oil prices, with no substantial spike in cost of risk or drop in profitability," it said.
- issacjohn@khaleejtimes.com