Combined NBAD and FGB would be Middle East’s largest bank, but decision months away

A combination of NBAD and FGB would be the biggest banking merger in the UAE since Emirates Bank International and the National Bank of Dubai joined forces in 2007 to create Emirates NBD. Mona Al Marzooqi / The NationalShow less

A merger of National Bank of Abu Dhabi (NBAD) and its competitor FGB would create the Middle East's biggest lender and one that is strong in corporate and retail banking in the emirate, analysts said.

It’s a combination that would also help improve profitability in a crowded industry, especially at a time when lower oil prices are hampering growth prospects. The two state-run banks yesterday confirmed that while they were in talks, a deal is not a sure thing. However, analysts said it makes sense.

The combined bank would hold assets of Dh627 billion. Qatar National Bank is currently the region’s biggest lender, with total assets at the end of March of 550bn Qatari riyals (Dh554.93bn).

Abu Dhabi Investment Council, the sovereign wealth fund, owns 69 per cent of NBAD, while the Abu Dhabi investment company Mubadala has a 7 per cent stake in FGB, according to the Abu Dhabi bourse.

Even though NBAD, the biggest bank by assets in the emirate, has made headway in building its consumer banking business in recent years, it would get a boost from joining forces with FGB, which has more loans to individuals on its books. FGB’s retail book is about 40 per cent of its total loans while NBAD’s consumer lending portfolio makes up just 17 per cent of its outstanding loans.

“FGB would benefit from much stronger wholesale banking proposition, after cutting back on ambitious plans this year by letting go a few hundred bankers,” said Jaap Meijer, the head of research at Arqaam, the Dubai investment bank. “NBAD is underrepresented in retail.”

The past year has been tough for banks with many laying off employees because of a decline in business. FGB let 100 people go in November amid increasing signs that the crash in oil prices is starting to have an effect on lenders’ profits as deposits dwindle and some customers, mostly small and medium-sized enterprises, face difficulty in paying debt back.

NBAD’s first-quarter profit fell by 11 per cent due to more money being set aside for bad debt as well as lower gains from investments amid a slowing economy, while FGB’s first-quarter profit declined by 6.3 per cent as fee income dropped amid falling demand for debt.

The combined market capitalisation of both entities would be Dh106.8bn compared to Qatar National Bank’s 116.2bn riyal market cap.

More than 50 banks and financial institutions serve 9 million customers in the UAE, making it one of the most crowded banking markets in the region. A combination of NBAD and FGB would be the biggest banking merger in the UAE since Emirates Bank International and the National Bank of Dubai joined in 2007 to create Emirates NBD.

Banking executives have for a long time urged consolidation in the industry to make it more efficient and profitable.

“We believe that consolidation would be positive for UAE banks from a return generation perspective,” said Waleed Mohsin, a Dubai-based analyst at the investment bank Goldman Sachs. “This is especially true given the fragmented nature of the market and the current challenging macro environment.”

Shabbir Malik, a Dubai-based analyst at the Egyptian investment bank EFG-Hermes, said that possibilities for a potential merger may see FGB absorbed into NBAD as it has a larger asset base and is more strategically important for the Abu Dhabi Government. Another scenario may see FGB and NBAD become subsidiaries of a newly created holding company, as was done when Emirates NBD was created by merging EBI and NBD.

The due-diligence process, or the period when the banks look at each others’ books, could take six months and a subsequent merger would then possibly take another year to a year and a half to complete, he said.

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