Dubai: The recent move by three Abu Dhabi-based banks — Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al Hilal Bank (AHB) — has highlighted the scope for more consolidation in the banking sectors in the UAE and GCC.
A potential three-way merger would establish a bank with combined assets of nearly $115 billion (approximately Dh422 billion), forming the fifth largest lender in the Middle East and North Africa (Mena) region after QNB ($232 billion), First Abu Dhabi Bank (FAB) ($188 billion), Emirates NBD ($130 billion) and National Commercial Bank (NCB) ($121 billion).
International organisations such as the International Monetary Fund (IMF) and the Institute of International Finance (IIF) have for long been calling for consolidation of the banking sector in the UAE and the region to benefit from economies of scale and cost savings that will come from mergers.
“The UAE banking sector is overbanked. Banking penetration measured both in terms of total assets held by banks and the size of the population, insinuates that the UAE is overbanked,” said Ehsan Khoman, head of MENA Research and Strategy, MUFG (Mitsubishi UFJ Financial Group).
While the UAE’s banking sector is the largest in the GCC — with $734 billion of assets held by banks as of end-2017 — a large number serving a small population has been pushing up operating costs and ultimately hurting margins. Currently, there are 49 commercial banks serving a population of about 9 million. In addition to onshore representative offices of nine international banks, there are a large number of offshore banking entities operating from the Dubai International Financial Centre (DIFC).
Analysts say the success of past deals — such as the merger between Emirates Bank and National Bank of Dubai and a further consolidation of the Islamic banking business of Emirates NBD group through a merger of Dubai Bank with Emirates Islamic — has set a template for reaping benefits of scale and cost savings.
“The recent merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) — forming First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest (after QNB) in MESA [Middle East & South Asia] — has already provided significant synergies to the bank, both in cost efficiencies and business opportunities as allowed by the larger integrated and better-diversified asset base,” said Emilio Pera, partner and head of Audit, KPMG Lower Gulf.
A crowded industry with banks of varying sizes in the UAE calls for consolidation to create stronger organisations. “UAE comprises a highly fragmented market, with a few large banks (FAB, Emirates NBD and ADCB comprising 53 per cent of the total UAE banking sector) and many smaller lenders, making it ripe for further consolidation,” said MUFG’s Khoman.
In the past, there has been speculation of other mergers. Following the FGB and NBAD merger, talks were ripe on the merger of a few smaller banks. “There has also been discussion on a potential merger between InvestBank and Bank of Sharjah, a transaction that will also provide more critical mass to two key banks in this emirate [Sharjah],” said Pera.
Global rating agency Moody’s believes the potential three-way merger of Abu Dhabi will bring about large savings. While consolidation of the banking system is expected to diminish the competitive pressure for funding, the competition for concentrated deposit sources — combined with the increase in US interest rates — is contributing to an increase in UAE banks’ funding costs.
“The merger of ADCB, UNB and AHB would contribute to consolidation of the over-banked UAE banking sector, which will increase banks’ pricing power, reduce pressure on their funding cost and increase their ability to meet sizeable investments,” Moody’s said in a recent note.
Analysts said the creation of bigger organisations with larger asset size will improve competitiveness and shareholder value. System consolidation will also increase banks’ scale and revenue base, improving their ability to meet sizeable investments related to compliance, digitalisation and new accounting standards such as IFRS9, according to Moody’s.
“It is encouraging to see the UAE taking the lead in consolidation, and the announcement of a merger seems to make good business sense, in line with creating regional champions. It will offer a number of synergies as the banks currently seem to have complementary products, systems, technologies and customer segments,” said Saeeda Jaffar, managing director at Alvarez and Marsal.