3 reasons for the eternal bank consolidation case

Everyone's been talking about how bank mergers are likely in the GCC soon. Amlak and Tamweel, the UAE's two big mortgage lenders, have been dancing around a merger for a while, but ever since Emirates Bank merged with National Bank of Dubai to form Emirates NBD in 2007, no major bank mergers have materialised.

That hasn't stopped people from talking about it. It's getting to the point where it almost seems as if the investment banks (and the analysts who work for them) are trying to put bank mergers in the news because they know mergers mean business. And they need business right now.

"One of the initiatives by the Government could be to co-ordinate mergers and acquisitions,"  Kamran Butt, the head of the Middle East equity research and private banking at Credit Suisse, told The National in February. "This will be a way to provide the needed stability."

Thing is, that rings more like a conspiracy theory than the truth. Even Sultan Nasser al Suweidi, the UAE's central bank governor, has chimed in saying banks should consider mergers, after all. Officials around the Gulf have been making similar statements recently, too.

"I've always encouraged bank mergers and at this stage I'd say mergers are a very good choice for banks," Mr al Suweidi told Reuters last October. "[This is] not necessarily for weak banks, but also for strong banks because mergers among strong banks will cut expenses and other administrative costs."

With all the talk from analysts and the encouragement from powerful officials, the question now is of course: why haven't any big banks merged? Read on...

Politics and control issues have likely played some role in a region where banks are often tightly-held by the powerful families and individuals who own them. So, too, has the fact that bank mergers are complex, take a long time (Emirates NBD's experience is sufficient evidence of this) and sometimes even fail. Mergers are thorny processes.

Today, A.T. Kearney Middle East, an international management consultancy, reiterated the claim that more bank mergers were likely at an Islamic finance conference in Dubai. Their arguments are worth considering, so I'll take them one by one:

1) There are fewer people per bank in the GCC than in the developed world. According to Kearney, there are 1.1 banks for every 100,000 people in the UAE. There are 2.2 banks per 100,000 in Qatar and a massive 16 banks per 100,000 in Bahrain. If we take the UAE as our example, that means the average bank has roughly 100,000 customers. In the UK, by contrast, there are 0.5 banks per 100,000 people. That means the average bank has 200,000 customers. This implies that there are more banks in the UAE than are economically necessary (and perhaps economically viable in the long run). Hence, consolidation.

2) The market share of the top banks is lower in the GCC than in the developed world. Kearney says the market share of the top three banks in the UAE is 32 per cent (16 per cent for the GCC). This compares to 55 per cent in Spain and 38 per cent in the UK. Banks in developed countries have fewer banks with larger market shares. Hence, as the UAE develops, we may see a similar trend. And that means consoldiation.

3) Market capitalisation has declined, making acquisitions attractive. This would be a convincing argument but for the fact that pretty much all bank shares have declined during the financial crisis. Still, it's worth bearing in mind that lower valuations on all sorts of assets mean acquisitions are more likely - especially acquistions of banks by non-banks.

"We see great potential for regional banks to consolidate and grow regionally," Alexander von Pock, a senior manager at A.T. Kearney Middle East, said in a statement. "While the region has witnessed very few banking mergers and acquisitions over the past years, there will be more activity in the future. GCC banks are still small compared to the big international banks and eventually will need to grow externally to compete. Banks need to proceed carefully, though, as most mergers fail to meet their objectives due to poor planning or execution."

Mr von Pock suggests that mergers may result in large national banks, which could consolidate into large regional banks. Investment banks could also be folded into retail banks.

We'll see if that story plays out. It sounds logical, as though it

should

. But I have to say I grow a little more skeptical every day a pair of big banks

don't

merge.