Can regional banks turn talk into action?

Pubished in MEED, 1 July 2018

The GCC may be divided on many issues these days, but one thing that appears to be common to many of the economies is a trend for banking consolidation.

Over the past few years, there has been a surge of merger and acquisition (M&A) talks between the region’s banks. But whether this will lead to a definitive shift in the market remains uncertain. It has proven relatively easy to launch exploratory talks, but banks often still find it hard to convince their shareholders to push a merger all the way through to the end.

The most recent to join the throng of potential deal-makers was Oman Arab Bank, which said on 24 May that it had approached Alizz Islamic Bank to discuss a potential “strategic collaboration” that could in time lead to a merger; Alizz has agreed to explore the opportunity. If the deal goes ahead, the combined entity would have assets of about $7bn.

It is just the latest example of a wider trend. Other deals in the offing include a proposal for Royal Bank of Scotland to sell its holding in Alawwal Bank to Saudi British Bank (Sabb) for $5bn – the first such bank merger in Saudi Arabia in almost two decades. A preliminary, non-binding agreement has been reached so far and if it goes ahead it should create the third-largest bank in Saudi Arabia, with assets of about SR271bn ($72bn). Olivier Panis, senior credit officer at Moody’s Investors Service, said the deal will strengthen and diversify Alawwal’s business while being credit neutral for Sabb and said “We expect both banks’ boards to reach a final agreement.”

Indeed, there is a sense among many industry analysts that such deals can be beneficial. “M&A could be a key source of value addition both at operational and strategic level” for GCC banks, according to Raghu Mandagolathur, managing director at Kuwait-based Marmore MENA Intelligence.

Also announced but not yet concluded is a mooted three-way merger in Qatar between Masraf al-Rayan, Barwa Bank and International Bank of Qatar, which has been the subject of negotiations since December 2016. In July last year, Kuwait Finance House said it was exploring a possible merger with Bahrain-based Ahli United Bank, although there has been no indication of progress to date. In November last year, Reuters reported that Bank of Sharjah was in talks to merge with Invest Bank, although there does not appear to have been much, if any, movement on this deal either.

As those examples suggest, there are plenty of talks going on, but the number of deals that are actually completed remains relatively small. According to data from Mergermarket, there is only a small handful of bank M&A deals in the region most years and they tend to be fairly small. Since 2014, only three deals have had a value of more than $1bn.

The data for recent years is skewed somewhat by the mega-merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank to create First Abu Dhabi Bank (FAB). With a value of $14.8bn, it was the largest banking merger in the Middle East and North Africa (Mena) region to date and the fourth largest by value across any industry, according to data compiled by the Institute for Mergers, Acquisitions and Alliances (IMAA).

On the other hand, a number of potential mergers have been called off recently, such as the mooted tie-up between Bank Dhofar and Bank Sohar. The two banks had announced in July 2013 their intention to combine forces and, if the deal had gone ahead, it would have created the largest bank in Oman. However, in October 2016 the two banks said they had been unable to reach agreement on certain important key issues.

Nonetheless, the pressure for consolidation is likely to continue. Many of the Gulf economies have been seen as ‘overbanked’ for years. There are some 61 banks operating in the UAE, for example, and more than 100 in Bahrain, according to those countries’ respective central banks. Most banks in these markets lack scale and, according to analysts, consolidation ought to strengthen the sector, allow for higher profits over time and make institutions more resilient to shocks.

Yet it is far from certain that the current wave of deals – or talks about deals – will spark a meaningful change. After all, there have been significant deals in the past that have failed to spark a sustained period of consolidation. For example, the second-largest UAE bank, Emirates NBD, was formed from a merger of Emirates Bank International and National Bank of Dubai in October 2007, and the country’s third-largest lender, Abu Dhabi Commercial Bank, was created from the 1985 merger of Khalij Commercial Bank, Emirates Commercial Bank and Federal Commercial Bank. Despite these deals, the banking sector in that country remains fractured. Elsewhere, the last successful merger in Oman was between HSBC Oman and Oman International Bank in 2012.

The authorities often appear keen to encourage such deal-making, but there are some significant stumbling blocks. One senior bank executive in Oman says “consolidation in the banking sector is required given the size of the market and the number of players. The government and the central bank have always encouraged such moves, but mergers are largely driven by shareholders and management”.

The potential benefits of having greater scale are often outweighed by the perceived risks and costs of integrating two different institutions, arguments over how best to divide control of a newly enlarged company and other issues. The ownership structure of GCC banks can be a key problem. Banks are often majority owned by well-established private shareholders that see little benefit in diluting their assets into a larger institution.

Such issues help to explain why ambitious banks within the GCC often find it easier to look beyond their immediate neighbourhood for deals. Turkey and Egypt are often seen as attractive markets for lenders to expand into. Commercial Bank of Qatar and Qatar National Bank (QNB) have both made acquisitions in Turkey during the current decade and, this year, Emirates NBD struck a deal to buy Turkey’s Denizbank. Meanwhile, Emirates NBD, QNB and Kuwait’s Al-Ahli Bank have all ventured into the Egyptian market.

The move towards consolidation within the banking sector is being echoed in other corners of the Gulf financial world, with a number of sovereign wealth funds (SWFs) pooling their resources, or at least talking about it. That has been led by the UAE, where both the Abu Dhabi Investment Council (Adic) and International Petroleum Investment Company (Ipic) have been folded into Mubadala. In Oman, there has also been discussion of merging the country’s two SWFs: the State General Reserve Fund and the smaller Oman Investment Fund. And there is an expectation that M&A activity among insurers might also pick up in the coming year so that underwriters can grow, diversify their operations and take advantage of potential efficiency savings, according to Moody’s.

Nonetheless, IMAA forecasts for this year suggest that caution may be advisable. Across all industries within the GCC, it expects $17.4bn-worth of M&A deals in 2018, which would be the lowest figure since 2004.