Objective observers can agree that when it comes to the UAE banking sector there are too many banks. According to the UAE Central Bank’s website, there are 46 banks registered in the UAE. Of these, 21 are local banks with significant commercial and retail operations in the country. The UAE’s population, which is shy of 9 million, is clearly over-banked, especially when compared to a country like Saudi Arabia where there are close to 30 million people but only 12 local banks.

The UAE banking sector has been ripe for consolidation for some time, and we witnessed the start of this process back in 2007 when Emirates Bank Intentional and National Bank of Dubai merged to form EmiratesNBD. It was expected at the time that this would usher in an era of consolidation and that further mergers would follow. Unfortunately, additional consolidation did not take place — perhaps interrupted by the global financial crisis — until the announcement last year of the intention to merge National Bank Abu Dhabi (NBAD) and First Gulf Bank (FGB).

The merger of NBAD and FGB is a welcome development, both at the macro level, in relation to the UAE banking sector, and on the micro level, as it specifically relates to these two banks. It reinstates the UAE banking sector on the path towards needed consolidation. Other banks, specifically the smaller ones that lack scale, will find it even more challenging in the presence of a new giant like NBAD-FGB to attract customers and grow profitability. This will ultimately lead to consolidating some of these smaller banks into larger ones.

Legacy banks

With a combined balance sheet of approximately $180 billion (Dh660.6 billion), the new NBAD-FGB will be the largest bank in the UAE and one of largest in the Middle East region. The new organisation will leverage the strengths of its two legacy banks to improve operating efficiency, reduce cost and create new revenue synergies. While both banks have a full-service offering, NBAD has stronger capabilities in corporate and transaction banking, as well as global capital markets, collateral lending and debt origination. FGB on the other hand has a stronger retail presence and retail product suite. With a solid balance sheet and more diversified access to funding sources, the combined entity is also expected to benefit from a lower funding cost. It is estimated that the combined impact of the merger from reduced funding costs and new revenue opportunities will result in a 3-4 per cent increase in revenues for the combined entity, relative to the two stand-alone banks. In addition, it is estimated that the new entity will generate USD 100-150 million per annum in operational cost savings through the elimination of duplicate functions and the consolidation of branch and ATM locations.

Full alignment

As with any merger, capturing the benefits will depend upon a successful integration of the two entities. Cost synergies are usually more straightforward to realise, however revenue synergies are reliant on a successful deployment of a new business strategy, which requires full alignment between the management of the two entities and their sales teams. A clash of organisational culture is usually the greatest challenge in any merger, and convincing the individual involved to adopt new approaches and a new combined strategy can run into inertia. FGB is the more nimble of the two organisations, with a strong growth culture, while NBAD has dominant risk management culture, so this may cause some friction along the lines of integration.

Risks notwithstanding, however, the combined NBAD — FGB would not only have scale as a local UAE player, but also as a global bank with presence in nearly 20 countries across the Middle East, the Americas, Europe and Asia. The scale of the new entity will allow it to grow its corporate client base globally as it facilities trades and corporate banking transactions between the UAE and the Middle East region with the rest of the world. It will also act as a conduit for capital flows from these regions into the UAE.

Global banking hub

The merger between NBAD and FGB is a welcome development that should act as a catalyst for further banking consolidation in the UAE, as well solidify the UAE’s position as a regional and global banking hub by providing greater scale and efficiency to the country’s banking sector. The merger was legally completed on April 2nd, and we are now eagerly watching to see how the two banks will carry out the challenging work of operationally merging the two entities, and how they will reap the benefits of this merger for their shareholders and the UAE economy as a whole.

Yaser AbuShaban, CFA, Member of CFA Society Emirates