Calls for mergers in the UAE’s banking sector have long been made given the existence of a relatively large number of banks addressing the needs of small target markets. According to an online business analysis, more than 50 financial institutions currently operating in the local market are serving the needs of less than 10 million people.
Further compounding the situation is the impact of weak oil prices on the banking industry at the local and regional levels. While the revenues of about 45 GCC banks — or approximately 80 per cent of the regional banking sector — grew 7.2 per cent in 2015, the figure is three percentage points down from 2014.
Similarly, although their profits climbed 6.3 per cent, this was still lower than the 14.7 per cent increase achieved in 2014. Extraordinary income dipped by 21.5 per cent.
The market is not only congested, but is also facing significant pressure from external uncontrollable factors such as oil price fluctuations, a weak real estate industry, and even the British exit from the European Union, to name a few. Mergers are indeed a viable option, especially amidst the economic uncertainties besetting the world today.
The move towards this end is growing as a means to diversify risk, reduce cost, and increase efficiency.
Take the case of Emirates NBD that was created following the successful merger of Emirates Bank International and National Bank of Dubai in 2007. The transaction was the biggest in the local market at that time.
Today, Emirates NBD is one of the biggest banking groups in the Middle East in terms of assets. In 2009, Dubai Bank and Emirates Islamic Bank also joined forces to establish Emirates Islamic, which is owned by the Emirates NBD Group.
Recently, the local sector welcomed the news of an approved tie-up proposal between First Gulf Bank (FGB), the third largest bank in the UAE by assets, and National Bank of Abu Dhabi (NBAD). They are the first largest local banks to consider consolidation since 2007.
The FGB-NBAD merger is expected to pave the way for more bank consolidations not only in the UAE but in its neighbouring economies as well. After the union is finalised by early 2017, financial consultants say that the industry could witness the rise of a regional powerhouse with $170 billion (Dh623.9 billion) in assets.
Additionally, their operations will be diversified, opening up more room for funding advantages and cost optimisation. Under this context, it is also in the best interest of smaller institutions to ultimately follow in the footsteps of the country’s largest banks so as not to lose out on a wide range of opportunities and benefits, from increased value generation to higher cost efficiency and revenue to wider market share.
Bank mergers across the world are usual occurrences, with risk management and other crucial concerns as the main considerations. It is normal for banks to conduct an exhaustive risk analysis to balance their deposit and credit portfolios, and mergers can diversify these risks to a significant extent.
Other reasons many banks are opting for mergers include a drastic increase in market competition, innovation of new financial products, and consolidation of national and regional financial systems.
Following the lead of their international counterparts, local banks can tap mergers to significantly improve the size and scale of the domestic and regional banking sector.
The writer is Managing Director, Orient Planet Group.
