Dubai– Deypha: Mergers of banks in the GCC region is not a new activity as in 2007 National Bank of Dubai and Emirates Bank International sealed a major merge to form Emirates NBD; however, it has risen now as a solution to decreased profitability and liquidity as a result of weaker oil prices.
The merger market was not seen as promising in the GCC. In October, the global rating agency Fitch did not adopt a positive overview said M&A activities is “still unusual” in the region.
Fitch attributed the moderate review to the lengthy and “difficult” negotiations between banks, giving example of planned merger of Bank Dhofar and Bank Sohar in Oman, which was suspended at that time for failed negotiations.
However, the merger and acquisition (M&A) market was shaken by the deal between First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD), which was completed in April to create First Abu Dhabi Bank.
Making the largest bank in the UAE, the merger was also positive as it resulted in assets of AED 670 billion in the new bank, to rank the second largest bank in the Middle East by assets, after Qatar National Bank (QNB), which holds $ 198 billion.
Even after the merge, Fitch said in May that shareholders appetite for mergers could be limited, and a surge is still unlikely to occur as some GCC countries still have small number of local banks, “this means that profitability has remained solid despite the macroeconomic pressures and is therefore less likely to be a merger driver,” it said.
Conditions of GCC banks
After by the slump in the oil revenues, Gulf banks are challenged by decreasing profitability and negative credit rating by Standard&Poor’s, especially banks in Saudi Arabia, Bahrain and Oman, Gulf News reported in March.
“The end of the commodities boom has also increased the pressure on GCC banks’ asset quality and profitability indicators,” S&P global credit rating analyst Mohammad Damak said in the report, expecting weak performance of banks in 2017 and 2018.
Profitability of banks is predicted to continue in those two years, affected by an expected crunch in government spending, “we also think that banks will become more selective and prioritise quality and risk profile over quantity and profitability,” said S&P analyst Suha Urgan in the same report.
Closing at 6.4% of growth, GCC banks credit growth recorded six-year low rate, with banks expected to take a “cautious stance” this year, according to U Capital banking outlook report.
The lower credit growth, along with large international sovereign debt issuance, was seen by Moody’s Investors to be a factor to improve funding conditions for banks, it said in a March report.
"Omani and Qatari banks will benefit the most from easing funding conditions, followed by banks in Saudi Arabia and the United Arab Emirates," says Moody’s analyst Mik Kabeya, Analyst at Moody's, adding that Bahraini and Kuwaiti banks will keep enjoying strongest liquidity in the region.
Merger Deals
The latest NBAD and FGB merger has led to speculation of similar actions across GCC banks. Arab Bankers Association said in a recent report that in the same month of that deal, the Abu Dhabi Commercial Bank was reported to be in talks with Union National Bank, but the former denied the news.
Additionally, two Saudi banks Saudi British Bank, which is 40% owned by HSBC, and Alawwal Bank, 40% owned by Royal Bank of Scotland, announced they are considering merging.
In Qatar, Masraf Al-Rayan, Barwa Bank and International Bank of Qatar were also reported to be in talks. Once completed, the International Bank of Qatar will likely convert to Shari’ah-compliant products, according to the report.
Banking mergers could be positive for credit rating as well, “we consider the systemic importance of the merged entity and the impact this may have on sovereign support for that entity,” Moody’s said in May’s report.
Moderate Expectations
Analysts don’t expect many merger deals in the region. Chief Executive Officer of Commercial Bank of Dubai Bernd van Linder said that the reason for banks to consider merging is not apparent, stressing that several parties denied merging news, Zawya reported.
The structure of GCC banks was also considered to be standing in front of deal approvals, Fitch said in the report in May, explaining that local stakeholders always control majority stakes, leaving minority shares for foreign partners.
“Cost savings are often put forward to support deals but these are rarely sufficient to convince shareholders, as cost-cutting in the GCC is difficult, and shareholders tend to have shorter-term objectives such as cash realization,” Fitch said.
Merging deals are justifiable for Fitch in case of creating market key players, as huge banks with strong business ties with governments would entail higher credit and liquidity risk.
Echoing the same opinion, Managing Director at BCG’s Middle East office Reinhold Leichtfuss said there is no indication of a possible boom in banking mergers this year, according to Zawya.
Meanwhile, Qatar’s Masraf, Barwa and IBQ merge is anticipated to strengthen the banking sector, Talal Samhouri, head of asset management at Doha-based Amwal told Gulf News.
Samhouri said the merge would put balance sheets in a solid position, “they have a small retail network with limited exposure outside Qatar, so will complement each other,” he said.
By Doaa Farid
