NBAD-FGB merger to reap higher revenues, earnings per share

Abu Dhabi: The revenue synergies from the merger between the National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) are expected to be multiples of the Dh500 million cost benefits, analysts said.

After announcing that the boards of both banks have approved the merger in the first quarter of 2017, spokespeople from NBAD and FGB said on Sunday the merger will reap a cost-saving opportunity of around Dh500 million a year that will be realised over three years.

“What nobody talks about is actually the revenue synergies and that alone could be a multiple of the cost synergies … This puts a lot of pressure on other banks in the UAE for sure for consolidation,” said Jaap Meijer , managing director of research at Arqaam Capital, in an interview with Bloomberg TV.

For shareholders, the merger also means improved earnings per share, with Arqaam Capital expecting them over a three-year time frame to gain 11.1 per cent and 15.9 per cent of NBAD and FGB respectively.

The merger will create the Middle East and North Africa’s largest bank, with assets worth Dh642 billion. The larger balance sheet will mean the new entity can offer lower costs of borrowing, stronger liquidity, and better profitability, which will ultimately mean better dividends and earnings per share.

“[A] bigger balance sheet will help the merged entity to tap more business and grab greater share of syndicated loans,” said Chirandeep Ghosh, a banking analyst at Securities and Investment Co in Bahrain.

In a statement on Sunday, FGB’s chairman said the new combined entity is “well positioned to be the strategic banking partners to the government and its agencies.”

Similarly, Moody’s Investors Service said on Monday it expected the merger to improve the capital base, reduce loan and deposit concentrations, and support further organic expansion of the business.

The ratings agency affirmed the deposit ratings of NBAD at Aa3/P-1 and those of FGB at A2/P-1. It also changed FGB’s long-term outlook from stable to positive, but kept NBAD’s long-term outlook at negative.

Despite the benefits, others also pointed the challenges that come with such a large merger.

David Tusa, managing director at business consultancy, Alvarez & Marsal, said that companies need flexible planning and relentless execution to actually pull off such deals.

“While the rationale of a transaction may look compelling and attractive, history shows time and again how hard it is to pull off mergers well…In our experience, getting the most out of a deal needs two lenses; one which looks at the details – from finance to operations and all points in between – and the other looks at people, culture, and how different teams in the different companies want to work together,” he said.

The merger is expected to trigger a wave of consolidation in the UAE’s overcrowded banking industry, with speculations that Abu Dhabi Commercial Bank and Union National Bank could be next to merge.

“[The NBAD-FGB merger] puts a lot of pressure on other banks in the UAE for sure for consolidation. In Dubai, it’s going to be very difficult considering the ownership structure and nature of business … but I think an ADCB/UNB, which is now speculated on, makes a lot of sense.

ADCB and UNB are in a similar situation in terms of valuation; UNB is actually very cheap versus ADCB, so ADCB is in a very strong position to pay a premium,” Meijer said.

The fact that the FGB-NBAD merger is going to create a giant of a bank will make competition much tougher in the industry, which will further spur mergers among other banks.

— With inputs from Reuters