GCC banks lenders unite to be leaner and efficient in tough conditions

Scale and competitive edge among the reasons for a wave of mergers and acquisitions in the banking secto

ABU DHABI.19th April.2008. Abu Dhabi Commercial Bank(ADCB) HQ, Abu Dhabi. Stephen Lock  /  The National. FOR ARCHIVE
Powered by automated translation

Financial institutions in the region, home to one-third of the world's proven oil reserves, are consolidating like never before. There is a banking merger transaction happening, or has recently been agreed upon in every GCC-member country.

"The news is coming together so it looks like a wave of mergers and they are all related but they are not. There are different reasons at work," said Chiro Ghosh, an analyst with Sico Bank in Bahrain.

"In most cases, it is to gain the scale and be competitive in changing markets, while in others it is strategic decision such as in the case of Saudi merger [between Saudi British Bank and Alawaal]. None of the deals are related to asset quality issues and it's not the case of one bank coming to rescue the other one in a merger," he said.

Merges are not a new phenomenon in the Arabian Gulf markets. Financial institutions battered by the 2008-09 financial crisis were widely expected to tie-up to salvage their troubled balance sheets laden with bad debts. However, despite eroding asset quality, banks rode the storm and the low interest rate environment helped them in slowly wiping out the toxic debt off their books.

This time around, the urge to combine businesses is driven by the need to become bigger and turn themselves into more efficient institutions.

Lenders, especially the tier-II banks recovering from a slow credit growth on the back of the oil-price slump and bad debts from their exposure to property and small- and medium-sized enterprises over the past three years, have to prepare to defend their market share from larger financial institutions.

The need for mergers is especially pressing given the tense global backdrop of slowing economic growth in the wake of the trade war between the United States and China.

The global appetite for corporate takeovers is at a four-year low with only 46 per cent of deal-making executives planning to engage in M&A deals, according to a survey by professional services company EY. However, the GCC is bucking the global trend with banking sector leading the deal flurry.

The latest in the string of GCC bank tie-ups is National Commercial Bank's plans to merge with rival Riyad Bank. NCB, the biggest lender by assets in Saudi Arabia, on Monday said it is in preliminary talks to merge with Riyad Bank, a move that could create a financial institution worth $182 billion (Dh668bn) in assets.

The talks may not result in a union, NCB said in a statement to the Saudi stock exchange, where its shares are traded. Riyad Bank, which is also listed on the bourse, confirmed discussions in a separate statement.

“Business models will have to be changed as GCC economies will have to adapt to newer changes,” Mazen Alsudairi, the head of research at Saudi Arabia’s Al Rajhi Capital said. “We are already seeing this happening as banks and some other industries are seeing consolidation in the GCC.”

The NCB and Riyad Bank’s proposed tie-up is the second M&A transaction announced this year in the kingdom, the biggest banking market in the GCC. The boards of Saudi British Bank and Alawwal bank, in October, approved a merger agreement between the two lenders that will create a financial entity with $73bn in combined assets. 

There are 12 banks in Saudi Arabia for a country with a population of about 30 million people. However common government shareholding in some banks through the Public Investment Fund allows for easier deals. 

Meanwhile in the UAE, banks want to increase the size of their balance sheets to cope with the tough operating environment going forward.


Read more


In the UAE, the second-biggest Arab economy, Abu Dhabi Commercial Bank, the second largest lender in the capital, is in talks for a possible three-way merger with Union National Bank and Sharia-compliant Al Hilal Bank, which could create the Gulf's fifth largest banking entity with about $114bn in combined assets.

The move to consolidate the three businesses follows Abu Dhabi's efforts to revamp its economy. The capital city has already 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 comes after the merger of two of Abu Dhabi's biggest lenders last year. National Bank of Abu Dhabi and First Gulf Bank combined their balance sheets to create First Abu Dhabi Bank, a $188bn banking powerhouse.

The success of the FAB deal, Egyptian investment bank EFG Hermes said, is an indication the three-way merger can be concluded successfully.

“In light of FAB’s successful merger, the Abu Dhabi Government (the key shareholder in all three banks) will be keen to see this merger go through,” EFG said in a research note. “The fact that ADIC [Abu Dhabi Investment Council] is the majority shareholder in all three banks, should ease the negotiation process.”

Elsewhere in the Gulf, mergers are taking place as well.

The National Bank of Bahrain, a majority government-owned lender, in October said it is considering making a voluntary offer for issued shares of Bahrain Islamic Bank, a move that could create a lender with $11.5bn in assets. 

In Qatar, lenders Barwa Bank and the International Bank of Qatar in August reached a final merger agreement, but a third bank, Masraf Al Rayan, fell out of the deal.

Omani lenders Bank Dhofar and National Bank of Oman are also in talks to create a combined entity with $20bn in assets.

While Muscat-listed Alizz Islamic Bank and Oman Arab Bank, a subsidiary of Omani conglomerate Ominvest, revealed in May their plans to explore the possibility of a tie-up.

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.

While these deals are brewing, the question remains: is there still room for consolidation in the Gulf banking sector?

Mr Ghosh said it is difficult to predict which of the markets will see more mergers, but logically speaking, the countries where there are a large number of banks, are the candidates for further M&A deals.

“In Bahrain and UAE, the probability of further mergers is quite high. Oman to some extent as well,” he said.