Abu Dhabi Commercial Bank’s potential merger with Union National Bank and Al Hilal Bank will likely create UAE’s third biggest bank with assets of Dh417 billion. Image Credit: Abdul Rahman/Gulf News

We are entering the year 2019, with two mergers in Saudi Arabia (SABB and Alawwal; NCB and Riyad), a three-way merger in UAE (ADCB-UNB-Al Hilal) and a possibility of one merger in Oman (Bank Dhofar and NBO) and one in Kuwait (Kuwait Finance House with Bahrain’s Ahli United Bank).

The sudden increase in consolidations are possibly due to a higher cost environment — increasing compliance cost, technology cost and/or limited product differentiation and geographic diversification between the banks which stunts the growth. Additionally, an era of high oil prices and intense capital spending (which created a lot of demand for credit) is over, and we are now moving closer to a more matured market phase, with moderate growth, planned visions and cost-conscious economies which demands a leaner financial system.

New big bank

If the merger of NCB and Riyad goes through, it will create a combined asset of $183 billion (Dh672 billion) and a combined lending market share of 29 per cent, making it the largest corporate lender in Saudi and falls just behind Al Rajhi as second largest retail bank. The common strategic shareholders — Public Investment Fund (PIF) and General Organisation of Social Insurance (GOSI), makes the merger a more feasible one and will have a combined stake of 58 per cent in the merged entity. NCB is the strongest of the two franchises with better profitability, solvency and asset quality metrics. Hence we expect Riyad Bank to benefit from the former brand, network and to make better use of its underutilised capital.

Revenue synergies could be limited given both are strong corporate focused banks; however, NCB’s banking model is relatively more meaty in retail, when seen from a revenue perspective (with roughly 46 per cent of revenues for NCB from retail banking versus 32 per cent for Riyad). And accordingly, we expect 2 per cent of revenue synergies of the combined revenue base. Banking sector consolidation typically aims for Cost synergies to account for 15 per cent of the combined cost base. However, the press release suggests that the merger should not lead to any mandatory layoffs. This implies potentially higher staff costs over the medium term, a possible ‘voluntary’ layoff exercise and slower pace of over-lapping branch closures.


Riyad Bank trades at a discount of 50 per cent to NCB historically. Typically, markets do not favour the strongest franchise (in this case NCB) on the merger news, as one would hope that weaker franchise tends to derive fundamentals benefits from the former. Accordingly, Riyad Bank will outperform NCB in the first few session. However, we expect that the Swap Ratio to be around the closing levels before merger announcement (1 NCB: 2.4 Riyad Bank).

Consolidation is likely to be the most popular way to boost growth in a subdued environment, as the competitiveness of the smaller banks will tend to erode when mergers of this intensity occurs. While banks need to have scale, brand, and technology to be able to leverage on their advantage to grab market share, and hence it is only fair for the smaller banks to create an alternative strategy for their survival and growth.