Business | Banking
Denials fail to dampen speculation on UAE bank mergers
Observers feel politics will not shield smaller financial institutions from market realities, although the only major consolidation has been of Emirates bank and NBD.
- By Andrew England and Simeon Kerr, Financial Times
- Published: 23:41 October 3, 2008
- Image Credit: Javed Nawab/Gulf News
- This time last year I was highly sceptical about the idea of mergers because I didn’t see the necessity... Now it’s far more probable than it has been recently because of the slowdown in global economic growth and local market funding. In addition, the tougher market conditions highlight weaknesses within certain smaller banks says Raj Madha,Banking Analyst
When the latest rumour of a merger involving Abu Dhabi Commercial Bank started doing the rounds, and sent the share price soaring, officials were quick to respond.
"Nothing is in the pipeline," they insisted. But with 51 banks in the United Arab Emirates, many of them small, the consensus is that consolidation has to happen somewhere at some point to create an efficient sector. The question is when.
Some observers believe it is inevitable, while others weigh the politics of the UAE's seven emirates and consider it unlikely soon.
The global financial crisis is deemed likely to worsen, adding to concerns about domestic liquidity, and this has increased attention on local lenders. The general view is that the UAE's banks are well capitalised and unlikely to suffer the fate of some western counterparts. Some analysts, however, suggest that market conditions further the argument for consolidation.
"This time last year I was highly sceptical about the idea of mergers because I didn't see the necessity or any decent combination," says Raj Madha, banking analyst at EFG-Hermes.
"Now it's far more probable than it has been recently because of the slowdown in global economic growth and local market funding. In addition, the tougher market conditions highlight weaknesses within certain smaller banks."
He believes consolidation will "certainly" happen within the next three to four years. But "whether it happens now is another matter".
UAE financial companies have been seeking to expand regionally. Government-linked Dubai Group has taken minority stakes in regional investment banks EFG Hermes and TAIB bank, and is set to exercise a stake in troubled Shuaa Capital. Last year Abu Dhabi's Oasis Capital bought a large stake of Addax, an investment bank based in Manama, Bahrain.
To date, the only large domestic merger in the retail and commercial sectors has been last year's deal between Emirates International Bank and National Bank of Dubai, which led to the formation of Emirates NBD. That deal surprised many and was pushed through by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.
It also led to speculation about whether Abu Dhabi would follow suit and merge National Bank of Abu Dhabi with ADCB, both of which are majority owned by the Abu Dhabi Investment Council.
Michael Tomalin, chief executive of NBAD, has spoken of the general need for greater consolidation in the UAE's banking sector if local banks are to compete with international players that have moved into the region. Eirvin Knox, chief executive of ADCB, has said part of his strategy is to ensure his bank is in a position to lead any potential merger.
Both men, however, recently reiterated that it would be up to shareholders to decide whether any merger should take place and downplayed suggestions of imminent activity.
ADCB has also been linked with two other Abu Dhabi entities, First Gulf Bank and Union National Bank. Analysts point out that it is smaller houses that are more in need of consolidation.
Of the 51 banks in the UAE, 23 are local institutions, ranging from NBAD, which has total assets of about Dh165 billion ($45 billion) and 57 branches, to smaller entities such as National Bank of Fujairah, which has total assets of about Dh12.5 billion and 13 branches, and Bank of Sharjah, with just four branches and Dh10.8 billion.
And while the global trend has been towards consolidation, several more banks have been launched in the UAE in the past year, including two Islamic institutions.
Georges Makhoul, managing director at Morgan Stanley for the Middle East and North Africa, says it is "inevitable" that there will be some consolidation.
"There are simply too many banks. I think it's also possible we'll see [consolidation] in other sectors, such as real estate and maybe retail," he says.
Political dynamics
"In terms of timing, it could happen very quickly so I think we will start to get clarity over the next two quarters."
But the political dynamics of the UAE could work against any trend towards consolidation. Chairmanships and seats on boards often go to influential players and members of ruling families and many would be reluctant to relinquish such prestige positions. Each emirate also tends to favour its own banks.
Mardig Haladjian of Moody's ratings agency says that under normal circumstances no bank in the Gulf would admit the need for a merger, "because it's like admitting failure".
In the current environment, however, banks can take "drastic measures that will be accepted and justified" because of what is happening elsewhere, he says. "The global credit crunch and the change in the market presents the perfect opportunity to consolidate."
Business Editor's choice
-
‘Wrong Way' Krugman
The source of our economic malfunction lies with government-mandated bank regulations
-
Greek exit could make Eurozone stronger
Departure will show limits of bailouts and allow remaining members to act much more like a unit
-
UAE upholds values of free trade
Recently released statistics confirm an established fact, namely that of the UAE embracing the free trade principle in general and imports in particular
