Why Gulf Banks Are Merging Like Never Before: QuickTake

(Bloomberg) -- Abu Dhabi is considering a merger between three of its banks, potentially the emirate’s second tie-up between lenders in just over a year. Saudi Arabia had its first bank merger in 20 years in May. Lenders across the region are undergoing possibly the biggest overhaul it’s witnessed, with at least half a dozen involved in takeover or merger talks.

1. Why are so many Gulf banks merging?

The region is heavily over-banked and lenders are being forced to merge as they seek to stay competitive in an era of lower oil prices. There are more than 73 listed banks in the six-nation Gulf Corporation Council, according to data compiled by Bloomberg, catering to a population of around 51 million. Regional banks are heavily reliant on government deposits, and those have been dwindling in sync with crude prices.

2. What’s the rationale behind three Abu Dhabi banks merging?

Consolidation among Abu Dhabi institutions was already picking up. The emirate’s largest lenders completed a merger last year to create First Abu Dhabi Bank PJSC. A tie-up between Mubadala Investment Co. and the Abu Dhabi Investment Council in March created a sovereign wealth fund with about $220 billion of assets. Now, Abu Dhabi Commercial Bank PJSC and Union National Bank PJSC are in talks to merge with Al Hilal Bank. That would create a regional powerhouse with assets of about $110 billion. The trio share the same majority owner in Mubadala, so the combination should be a smooth one.

3. What’s the bigger picture?

Growth in banking assets is highly correlated with that of regional GDP, which moves largely in tandem with oil prices. Since 2014, the Gulf countries -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and U.A.E. -- have been hit by a sustained period of low crude prices, which has caused governments to re-calibrate budgets, as well as dip into state deposits. Banks have also faced pressure from higher compliance costs because of new accounting standards, technological changes and the introduction of value added tax.

4. What other mergers are happening?

Saudi Arabia’s landmark merger in May saw HSBC Holdings Plc affiliate Saudi British Bank take over Alawwal Bank, which was backed by Royal Bank of Scotland Group Plc, in a $5 billion stock deal. A month later, JPMorgan Chase & Co. sold its 7.5 percent stake in Saudi Investment Bank to the Riyadh-based lender. Qatar has a far higher ratio of banks to citizens than the rest of the region, with 18 local and international lenders serving 2.7 million people. Three-way bank talks faltered this year because of shareholder disagreements over the valuation, but two of the lenders -- Barwa Bank QSC and International Bank of Qatar QSC -- reached a final agreement to merge in August. In Oman, where the biggest lender controls close to 35 percent of all banking assets, two separate mergers are taking place.

Why Gulf Banks Are Merging Like Never Before: QuickTake

5. Can we expect more deals?

It’s difficult to say. Bank mergers are complex and, given the large holdings by governments, highly dependent on political backing. While many discussions have started, only a handful have completed. That said, more regional banks may be forced to combine in order to stay relevant and as smaller lenders are threatened. "If this (Abu Dhabi) merger goes through, it will be a matter of time when we will see a similar step in Dubai, most likely with DIB," said Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds in Frankfurt, referring to Dubai Islamic Bank PJSC.

The Reference Shelf

  • A QuickTake on Saudi banking’s first merger in 20 years.
  • The quest for size has Gulf banks rushing to seal deals.
  • Which Saudi banks lead the pack and which are still making inroads?

©2018 Bloomberg L.P.

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