Shareholders of NBAD and FGB expected to benefit from combined valuation of both stocks

Dubai: Shares of both National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) surged 15 per cent and 7.2 per cent respectively the first trading session following the announcement by both banks that they are in discussions for a potential merger.

Analysts say the buoyancy in the market indicates that shareholders of both banks stand to gain from the deal if it goes through.

NBAD is the largest bank in the UAE by market capitalization and the first by total assets. It was established in 1968, offers full banking services and has 121 branches in the UAE, with a broad international presence of 57 branches in 14 countries including Egypt, Oman, Sudan, Jordan, Kuwait, Bahrain, France, the UK, Hong Kong and the US, with a representative office in Libya.

FGB (formerly known as First Gulf Bank) is currently the third largest bank by assets in the UAE Established in 1979, FGB is headquartered in the emirate of Abu Dhabi. FGB offers a wide range of financial services in the wholesale, consumer and treasury banking sectors, including Islamic banking and bancassurance solutions for businesses and consumers via a network of branches across the UAE. Internationally, FGB has a branch in Singapore - that includes global wealth management services and a branch in Qatar, representative offices in London, India, Hong Kong and Seoul, South Korea, and a subsidiary in Libya.

Positive effect

The stock of the combined entity is expected to benefit from improved representation in key emerging markets (EM) indexes. “ We expect a significant positive effect on MSCI EM and FTSE EM Index representation We assume that the new combined entity will have a full market capitalization of about $26.1 billion (Dh95.7 billion) with an index foreign inclusion factor (FIF) of 25 per cent. The FIF is defined as the minimum of the free float (88 per cent for FGB and 31 per cent for NBAD) or the foreign ownership limit (25 per cent for both),” said said Janani Vamadeva, an analyst with Arqaam Capital Research Offshore.

The post-merger new combined entity is expected to emerge as the second largest stock from the UAE, after etisalat, in the MSCI EM Standard Index with a combined weight of about 18 basis points with passive tracking of about $380 million.

“Any signs of consolidation and cost efficiency is positive for the whole economy and companies’ balance sheets,” said Tareq Qaqish, the Dubai-based head of asset management at Al Mal Capital PSC. “NBAD will be growing its local market share while FGB will enjoy an international platform. It makes sense.”

Both the banks said although they have commenced discussions on a potential merger at this time, there is no certainty that discussions will result in a merger or combination. While there have been no official comment on valuation and potential share exchange ratio, Dubai based Arqaam Capital said they expect an exchange ratio of 1.15 NBAD share for 1 FGB share.