Dubai: The high-profile merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) in the UAE last year had triggered a number of unconfirmed reports of impending bank mergers across the GCC, however, most of these reports were eventually denied by bank managements.

While bankers and analysts say the time is ripe for more bank mergers in the region, they expect more merger deals to happen in the Islamic banking and Takaful industry.

Most ongoing or rumoured merger talks are happening in the Islamic banking industry. The relatively small size of Islamic banks is one of the compelling reasons for them to consider consolidation, according to Muscat based UCapital.

“Small size of Islamic banks is a factor that hurts them more forcing them to look for different ways of survival. Such is the scale of top four conventional banks that their assets cover up the entire assets of Islamic banks in the GCC. Combined assets of four conventional banks stand at $621 billion whereas the assets of entire Islamic banks in GCC stand at $563 billion as of the second quarter of 2017. Hence, creation of bigger Islamic banks has become necessary as it could rival not only other Islamic banks in the region, but also the giants on the conventional side,” UCapital said in a recent note.

The last wave of mergers in the Islamic banking industry were seen in 2012-13 when Dubai Bank merged with Emirates Islamic Bank and Capivest, Elaf Bank and Capital Management House merged to form Ibdar Bank.

A proposed merger of Kuwait Finance House and Ahli United Bank is expected to result in second biggest Islamic Bank in the GCC after Al Rajhi Bank. If merger materialises, the merged bank will have presence in twelve countries. Since KFH will account for 64 per cent of the merged assets and assuming the merged entity would operate from Kuwait, it would leave National Bank of Kuwait behind and become the biggest bank in Kuwait.

Merger of Qatari banks Masraf Al Rayan, Barwa Bank and International Bank of Qatar which was announced last year is progressing and is expected to complete by end of the year. Masraf Al Rayan, which is the acquiring bank, was holding discussions with the other two lenders to finalise the valuation of the deal.

While many expected the successful merger of NBAD and FGB to create a template for more mergers among conventional banks, credit rating agency Fitch expects a surge in mergers and acquisitions among banks in GCC countries is unlikely due to structural impediments, despite market conditions that appear conducive, Fitch Ratings said in a recent note.

“We believe tie-ups will be limited to those that create leading domestic market players or allow shareholders to realise value immediately upon the inception of the merger,” said Redmond Ramsdale, Senior Director Financial Institutions.

Banks across the region are facing pressure on profitability and tighter liquidity, especially in countries where public sector deposits have been withdrawn from banks to shore up government finances weakened by lower oil prices. The UAE, Bahrain and, to some extent, Oman would benefit from consolidation as many banks in these countries lack sufficient scale.

“While these conditions might increase motivation for M&A and some banks are discussing potential deals, we believe shareholder appetite will be limited, given the banks’ sustained solid profitability and the prevalence of large private local shareholders in some GCC countries,” said Ramsdale.

Some countries have only a small number of local banks, which limits competition. This means that profitability, although down, has remained solid despite the macroeconomic pressures and is therefore less likely to be a driver for M&A.

“There is no compelling reason for a big number of regional banks to rush into merger deals. We do not expect to see many M&A deals in the UAE banking sector. The rumours that were in the markets were subsequently denied by all parties,” said Chief Executive Officer of a UAE based bank.

According to Fitch the ownership structure of GCC banks is also a stumbling block to M&A approvals — well established local private shareholders often control sizeable stakes and foreign banks only hold minority stakes. Cost savings are often put forward to support deals but these are rarely sufficient to convince shareholders, as cost-cutting in the GCC is difficult, and shareholders tend to have shorter-term objectives such as cash realisation.

M&A deals are much more likely to complete if they create domestic market leaders. Becoming a bigger bank strengthens ties to the government through business flow, and shareholders are also often attracted by stronger resilience of the new entity to credit or liquidity risk.