Major mergers and consolidation still elusive for Gulf banking sector

DUBAI: Big-ticket consolidation activity remains elusive for the Gulf banking sector despite this year’s merger of the UAE’s two biggest banks, an industry report from Al Masah Capital said.
The persistent weakness in oil prices and rising budget deficits — which resulted in the withdrawal of public money from lenders — have trimmed the Gulf banks’ profitability, and thus have strengthened the rational for reducing the density of lenders operating in the region.
“The rationale for such consolidation are focused toward reducing costs, increase product offerings, diversification of risk and improve cost efficiencies. More importantly, the consolidations have been aimed to create a bigger bank to be able to compete in a challenging and highly competitive environment,” Al Masah said in the report.
During the past decade, Bahrain was the Gulf’s most active center for mergers and acquisitions in the region with 20 deals consummated, followed by UAE with 19, Kuwait with 12, Qatar with 10, Oman with 7 and Saudi Arabia with one deal.
The UAE led in terms of transaction value at $20.14 billion (SR75.52 billion) or 72.4 percent of the total, while Qatar accounted for $2.61 billion or 9.4 percent, followed by Kuwait with an amount of $2.01 billion or 6.1 percent of the aggregate.
The merger between National Bank of Abu Dhabi and First Gulf Bank on April 1 resulted in the creation of the UAE’s biggest bank — First Abu Dhabi Bank — with total assets worth over Dh670 billion, and one of the largest in the Middle East and North Africa.
“The rationale for such consolidation are focused toward reducing costs, increase product offerings, diversification of risk and improve cost efficiencies. More importantly, the consolidations have been aimed to create a bigger bank to be able to compete in a challenging and highly competitive environment,” Al Masah said.
“Like any other sector, the size of the bank plays an important role within the banking sector. Firstly, it increases the bank’s ability to fund big-ticket projects, especially the ones which are critical and important for the government’s long-term strategic plans. Secondly, cost rationalization and synergies between the two institutions improves the profitability.”
“Thirdly, it will strengthen the sector’s ability to support the broader economy by improving the liquidity in the system. Lastly, the bigger banks will have the ability to tackle the slippages and absorb them with a large capital base, which reduces any systemic risk.”
Al Masah said that with around 50 lenders currently competing in the Gulf, and amidst high credit penetration and challenging economic outlook, government regulators should encourage mergers and acquisitions to improve the regional banking sector’s profitably and liquidity.
“The UAE, Bahrain and, to some extent, Oman would benefit from consolidation as many banks in these countries lack sufficient scale,” Al Masah said, while other Gulf nations only have a small number of local banks, which limits competition.