Boards of Kuwait Finance House and Ahli United Bank agree terms of possible merger

Deal moves a step closer to creating an Islamic banking entity with $96.7bn of combined assets

Board of KFH and AUB have approved final share exchange ratio. Andrew Henderson / The National

The boards of Kuwait Finance House and Ahli United Bank agreed on a share swap ratio, a crucial step in the former's bid to take over its smaller Bahraini counterpart and create a combined Islamic banking entity with $96.7 billion (Dh354.7bn) in assets.

The Bahraini entity said its board approved a final exchange ratio between the two lenders of one KFH share for every 2.325581 AUB shares, AUB said in a statement to Boursa Kuwait, where its shares trade.

“Approval of the … share exchange ratio does not imply that an official acquisition offer has been made by KFH,” AUB said.

The announcement follows KFH's statement last Thursday approving the terms, following due-diligence reports on AUB's books. A final decision on the deal is subject to approval from shareholders of both banks, central banks and other authorities in Kuwait and Bahrain, KFH said, without disclosing when a formal offer would be made.

The approved ratio is the same as the one announced in January, when the lenders hired HSBC and Credit Suisse as advisers to carry out financial and legal due diligence of each other’s accounts.

“Using that ratio, we calculate that AUB shares are trading at a 7 per cent discount to the share swap ratio- implied price,” Mohamad Al Hajj and Elena Sanchez-Cabezudo, equity analysts at Egyptian investment bank EFG Hermes, said in a research note on Sunday.

“This merger [assuming completion before May 2020] will increase KFH’s expected weight within MSCI Emerging Market Index by 8 basis points and increase expected flows in May 2020 by $370 million.”

KFH has tried to acquire AUB in the past, but talks stalled over a difference in valuation, Bloomberg reported.

Lenders in the Arabian Gulf are increasingly looking at mergers and acquisitions in a bid to gain scale and cope with tougher operating conditions against a weakening global economic backdrop. KFH’s bid to acquire AUB follows several recent merger deals in the Gulf, including the three-way tie-up between Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank in the UAE.

Dubai Islamic Bank, the biggest Sharia-compliant lender in the UAE, is in the process of taking over its smaller rival Noor Bank, while National Commercial Bank in Saudi Arabia is pursuing a merger with its competitor Riyad Bank.

National Bank of Bahrain, a majority government-owned lender, is in discussions with Bahrain Islamic Bank about a potential offer for the Sharia-compliant entity as it looks to widen its client base and expand its reach into the Islamic banking market, it said in August.