Dubai: The three-way merger of Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al Hilal Bank will have positive impact on the medium-term profitability of the new entity, according to banking sector analysts and rating agencies.

The merger will make ADCB, the merged entity, the third-largest UAE bank with a total asset size of Dh420 billion ($114 billion) followed by First Abu Dhabi Bank (FAB) and Emirates NBD with asset sizes of Dh744 billion and Dh500 billion, respectively.

Many analysts expect the estimated cost synergies from the merger has strong upward potential. “The key source of synergies will be costs, by reducing headcount and closing overlapping branches. Management is targeting cost synergies of Dh615 million annual and one time integration cost of Dh800 million. We note that cost synergies of this merger appears lower compared to NBAD/FGB merger,” said Aarthi Chandrasekaran is Vice-President of Shuaa Capital.

Total estimated cost synergies amount to 13 per cent of combined cost base. This compares to the original 8 per cent cost savings from combined base announced originally announced by NBAD-FGB, but this has subsequently been revised to 25 per cent.

“We see strong upside [to cost synergies for the latest merger], given the extensive network of UNB and Al Hilal’s high cost to income ratio (57 per cent, 2 times as high as the group average) despite remaining a separate Islamic arm, especially with the combination under the helm of ADCB management, widely recognised as strong,” said Jaap Meijer, director of research at Arqaam Capital.

While the projected cost savings from the merger may not be visible during the first two years because of some of it is expected to get offset by the costs relating to integration analysts said over the medium term, the combined entity will benefit earnings boost.

“Front-loaded integration costs of Dh800 million are likely to offset this [cost savings] in the first two years. So, synergies should start to support earnings as of year three, unless the integration process proves more complex and restructuring costs or digital investment increase,” said Edmond Christou, Bloomberg Intelligence’s GCC Financials Analyst.

Strong balance sheet

The combined bank will benefit from a strong balance sheet, solid financial metrics, and favourable access to capital markets. Its capital position will comfortably exceed Basel III regulatory requirements. The combined bank’s funding profile will be diverse, with pro forma customer deposits accounting for 75 per cent of total funding, including a strong low-cost CASA (current account savings account) base of Dh96 billion, and wholesale funding making up 18 per cent of total funding as of 30 September 2018. The bank will also have a healthy net loan-to-deposit ratio of 96.5 per cent as of 30 September 2018.

“We expect revenue synergies on the funding side of Dh300 — 400 million. We expect the combined entity to benefit from ADCB’s stronger treasury team, which should result in lower cost of funds, by optimising the funding mix of UNB (more wholesale debt, less time deposits),” said Meijer.

Analysts said the merged entity will seek scale and sophistication as the bank is set to gain market power and improved pricing and cost of funding. “Added to this are its strong digital and cross-selling capabilities that should drive midterm revenue synergies. The bolstered lender’s greater exposure to the corporate sector and government entities is supported by UNB’s strong track record. The increased share of Islamic lending, driven by Al-Hilal Bank, will boost the company’s competitiveness and product offerings,” said Christou.

Post-merger, ADCB is supported by the significantly enhanced capital base with common equity capital of 14.1 per cent, and capital adequacy ratio of 17.9 per cent. “Merger demonstrate that capital ratio will be strengthened, lending capacity improved and risk concentration to the real estate sector lowered to about 32-33 per cent versus 2018’s 39 per cent level. A larger network and digital capabilities in the retail and Islamic bank could support the acquisition of less costly deposits (CASA), aiding net margin,” said Christou.