A potential acquisition of Noor Bank by Dubai Islamic Bank would be a positive move for the buyer while further consolidation would benefit the UAE's overcrowded banking sector, according to EFG-Hermes.
There is room for more consolidation among local lenders as the UAE is overbanked, with 22 local and 38 foreign banks, most of which have "sub-optimal" market shares, the Egyptian investment bank said in a report on Tuesday. The combined bank would have an assets market share of 10 per cent.
"If the DIB/Noor deal goes ahead, our initial impression is that it would be value accretive for DIB’s shareholders as the merger would unlock synergies," EFG-Hermes said in an April 9 note.
The latest report comes amid a series of mergers and potential tie-ups among lenders in the Middle East seeking to consolidate to improve competitiveness and boost capital. Dubai Islamic Bank said on Monday it does not comment on market rumours after Bloomberg reported that the lender was considering acquiring Noor Bank. It held preliminary talks with its smaller rival Noor Bank's shareholders, which are in early stages and may not lead to a deal, Bloomberg said, citing sources.
EFG-Hermes expects a potential transaction to be made through a share-swap.
It estimates a share-swap of 1 DIB share for 7.8 Noor Bank shares that would lead to a 1 per cent earnings per share dilution for DIB.
Both banks are majority owned by the Dubai government or related entities. The Investment Corporation of Dubai (ICD) owns owns a 28 per cent stake in DIB and 23 per cent in Noor Bank.
"A common shareholder, generally helps the negotiating process," EFG-Hermes said.
The merged entity would have an assets market share of 10 per cent, as Noor Bank's assets amount to Dh51 billion or 2 per cent market share and DIB’s assets amount to Dh224bn or 8 per cent as of 2018, it said.
For last year, Noor Bank reported a net profit of Dh487 million compared to Dh4.1bn for DIB. Noor has slightly more retail focus than DIB. Its retail loans comprise 35 per cent of total loans compared to DIB's 26 per cent. Noor Bank's costs amount to 24 per cent of the combined bank’s cost base and it has 10 branches compared to DIB’s 75 branches.
"We expect DIB's loan growth to continue to outpace the sector's as the bank is well capitalised and management remains confident about growth opportunities," the report said. "The bank's credit quality metrics have improved, however provision reversals should fade as non-performing asset ratio approaches a normalised level."
EFG-Hermes has a "buy" rating on DIB.