Gulf’s banking sector ripe for wave of mergers

19 March, 2021 12:00 AM printer

DUBAI: A new wave of mergers and acquisitions could take place within the GCC’s banking sector as profit margins are pressured due to pandemic-induced headwinds, according to S&P Global Ratings.

The need for recapitalisation as provisions for bad loans rise and the asset quality deteriorates also supports the case for the consolidation of financial institutions in the region, Mohamed Damak, senior director for financial institutions ratings, said.

“Ultimately, lower profitability could start a new wave of M&A, and we think this wave, if it starts, will be different from what we have been observing so far,” Mr Damak told a webinar on Wednesday, report agencies.

“It might involve consolidation across different GCC countries, or consolidation across different emirates here [in the UAE].”

Profits for most regional lenders, like their international peers, shrunk last year as they proactively allocated funds to cover potential loan losses. Loan book growth has also slowed and margins are under pressure amid historically low interest rates.

GCC banks have already experienced significant M&A activity after the three-year oil price slump that began in the middle of 2014. Shareholders who held stakes in more than one lender – typically regional governments and related entities – drove consolidation, creating stronger financial institutions with more robust balance sheets to better face tougher operating conditions.

The first wave led to the creation of some of the strongest financial institutions. First Abu Dhabi Bank, the UAE’s largest lender, was formed through the merger of National Bank of Abu Dhabi and First Gulf Bank in 2017.

Abu Dhabi Commercial Bank also completed a three-way merger with Union National Bank and Al Hilal Bank in 2019. Last year, Dubai Islamic Bank completed its acquisition of competitor Noor Bank to create an Islamic lender with total assets of more than Dh275bn ($75bn).

In Saudi Arabia, the kingdom’s largest lender National Commercial Bank, is edging closer to its takeover of smaller rival Samba Financial Group that will create a lender with a 31 per cent market share by assets.

Kuwait Finance House and Bahrain’s Ahli United Bank have also been in cross-border merger talks, but these were postponed in April last year.

A new wave of mergers will be more opportunistic and spurred by economic rationale, Mr Damak said.

“It would definitely require a more aggressive stance by managements to clear hurdles … convincing for example boards or shareholders … to accept to be diluted,” he said. “That exercise might be easier if they have to recapitalise their banks anyway.”