Dubai: Economic challenges faced by the region in the wake of lower oil prices lower economic growth outlook has given rise to calls for creation of more efficient banking sectors in the GCC.
According to analysts, bank mergers in the GCC is becoming easier than in the past, thanks to the changed economic environment.
“The completion of bank mergers in GCC countries has historically proven challenging because of shareholders’ high pricing expectations and the healthy profitability of banks in the region. However, lower economic growth following the decline in oil prices mid-2014 is gradually driving consolidation in the over-banked region,” said Moody’s said in a recent note.
While the talks on the merger of Abu Dhabi based banks such as Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al Hilal Bank (AHB) are still at an exploratory level, analysts said a potential three-way merger is made easy because ADCB, UNB and AHB have some common shareholding, with Abu Dhabi Investment Council holding stakes of 63 per cent in ADCB, 50 per cent in UNB and 100 per cent in AHB.
“Abu Dhabi is a market where top-line growth is pressured and there are more challenging regulatory (prudential and conduct) and capital demands. This together with increased competition from other banks who are introducing more innovative and technology-enabled solutions to the market make consolidation inevitable, and therefore not surprising,” said Moody’s.
Consolidation is widely seen positive for the UAE banking sector as long-term benefits outweigh short-term challenges. “Larger banks in a consolidated system will enjoy scale benefits, leading to better diversifications of risks, stronger overall profitability, and contributing to higher credit ratings. Smaller banks will be more capable of absorbing systematic shocks,” said Aarthi Chandrasekaran, vice-president of Shuaa Capital.
“Moreover, a stronger banking sector is imperative if the UAE plans to adopt an independent monetary policy in the long run. Fewer banks in the country, will make regulation and supervision easier for the UAE’s central bank.”
Although the talks surrounding the three-way merger among Abu Dhabi banks has seen expectations rising among investment bankers, M&A specialists and investment banks on a new round of imminent bank mergers in the UAE, some say it is too early to predict an M&A surge in the UAE’s banking industry.
“While market is anticipating more rush of M&A activity in the banking space, we strongly feel that the next merger is unlikely in the short term. We opine that the regulators would ideally want to complete this merger successfully given the new bank’s systematic importance and overload of regulatory work,” said Chandrasekaran.