Abu Dhabi's ADCB in merger talks with UNB and Al Hilal Bank

The three-way merger could be the second biggest M&A deal in Abu Dhabi after creation of FAB last year

The proposed merger between three UAE banks - Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank – would be credit-positive for the country’s banking industry, according to Moody’s. Chris Whiteoak / The NationalShow less

Abu Dhabi Commercial Bank, the second largest lender in the emirate, is exploring the possibility of a merger with rival Union National Bank and Sharia-compliant lender Al Hilal Bank, which could create the Gulf's fifth largest banking entity with about $114 billion (Dh418bn) in combined assets.

The bank confirmed "commencement of the exploratory talks regarding a potential merger" with UNB in a statement to the Abu Dhabi Securities Exchange, where its shares are traded. Discussions are also taking place with Al Hilal Bank, it said. The talks "are at a very preliminary stage and may not result in a transaction," ADCB said.

In a separate regulatory disclosure on Tuesday, UNB confirmed the initial talks with ADCB, however, it did not mention talks for a potential merger with Al Hilal Bank. UNB will "update the market if and when there are any material developments," it said.

ADCB and UNB shares after the merger news closed up 12.83 per cent and 14.77 per cent respectively on Tuesday.

Gulf Banks

Abu Dhabi has revamped its economy after a three-year oil slump and has merged state-backed companies, including two of its sovereign wealth funds, to create larger, more efficient entities amid tougher economic conditions. The potential tie-up of ADCB, UNB and Al Hilal Bank follows the merger of two of Abu Dhabi's biggest banks last year when National Bank of Abu Dhabi and First Gulf Bank combined their balance sheets to create First Abu Dhabi Bank, a $188bn banking powerhouse in the UAE.

ADCB and UNB are majority-owned by the Abu Dhabi Government. The government controls 100 per cent of Al Hilal Bank through Abu Dhabi Investment Council, the state-owned company that has tied-up with Mubadala Investment Company.

The common ownership in all three banks should "ease the negotiation process," EFG-Hermes said in a research note. The deal to create an entity, which will be the third-biggest UAE bank in terms of loans and assets, may face some challenges as ADCB and UNB are primarily conventional banks and Al Hilal is an Islamic lender. However, Dubai's Emirates NBD serves as a "good blue print for these banks to follow as ENBD is a conventional bank, which has a fully Islamic subsidiary," the investment bank noted.

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If the deal concludes successfully, the three way tie-up will be good news for consumers, both in corporate and retail segments, said Chiro Ghosh, a banking analyst at Sico Bank in Bahrain.

"The merged entity with a bigger balance sheet will be able to cater to much bigger loans, which is good for the corporate sector as they would have another avenue of big-ticket loan deals," Mr Ghosh said. "It will also mitigate the balance sheet advantage, which FAB currently has over these banks as individual financial entities."

The new entity would also be able to lower its cost of funding and have the ability to pass that advantage on to customers, he added.

Banks in the Arabian Gulf region are increasingly looking to consolidate in a bid to gain scale and cope with tougher operating conditions as lower oil prices have squeezed profit margins. With prices of crude hovering at $70 per barrel in recent months, the lenders are set to see a stronger performance this year as macroeconomic conditions improve and demand for credit grows, according to analysts and reports by rating agencies Moody's Investors Service and S&P Global Ratings.

Last month National Bank of Bahrain said it was in talks to buy Islamic Development Bank’s 14.4 per cent stake in the Sharia-compliant Bahrain Islamic Bank.

NBB’s move follows merger talks between Omani lenders Bank Dhofar and National Bank of Oman to create an entity with $20bn in combined assets. The merged lender will account for 25 per cent of the sultanate's aggregate banking assets and loans market, according to EFG-Hermes. In May, Muscat-listed Alizz Islamic Bank and Oman Arab Bank, a subsidiary of Omani conglomerate Ominvest, said they were exploring the possibility of combining their balance sheets.

Kuwait Finance House is also seeking a potential merger with Bahrain's Ahli United Bank, reviving earlier talks for a deal that would create a new Islamic lender worth $92bn in combined assets.