Bank Dhofar-1681208967638
Dhofar was previously in talks to merge with National Bank of Oman, a deal the lenders abandoned in 2019. Image Credit: Bloomberg

Muscat: Oman’s Bank Dhofar plans to submit a non-binding bid to merge with smaller rival Ahli Bank in a deal that could create an entity with more than $19 billion in assets.

Any transaction will be subject to approval from regulators and the boards of both lenders, Bank Dhofar said in a statement late Monday, without giving further details.

Dhofar is Oman’s second-largest lender with $11.2 billion in assets. Its smaller rival, partly owned by Bahrain’s Ahli United Bank, has just under $8 billion in assets.

A merger between the two Muscat-based lenders would mark another step in the consolidation of the banking industry in Oman, where the government is reorganizing state entities to boost efficiency and returns. About 20 local, regional and international banks cater to a population of over 5 million.

HSBC Bank Oman is in the process of combining with Sohar International Bank and in 2020, Oman Arab Bank agreed to take over local competitor Alizz Islamic Bank.

“Oman is reducing excess capacity in the banking sector in the quest for size, and efficiency,” said Joice Mathew, head of equity research at United Securities in Muscat. “Local banks have small size, and the competition is very stiff for both assets and liability products.”

Shares in Bank Dhofar were up 3 per cent on low volumes Tuesday in early trading.

Despite higher oil prices, which have improved Oman’s ability to support the banking sector, increased compliance costs with the implementation of new accounting standards and the rising cost of funding are compounding pressure on small- and medium-sized lenders to consolidate.

Dhofar was previously in talks to merge with National Bank of Oman, a deal the lenders abandoned in 2019. Its stock has fallen 11 per cent since the start of the year, valuing it at $1.21 billion. Ahli Bank shares have risen close to 2 per cent in the same period, valuing the lender at $881 million.

“Post-covid, Bank Dhofar’s NPL shot up, and cost of credit remained at elevated levels. However, Ahli Bank has a better asset quality and loan book structure,” Mathew said. “A combination should result in visible synergies sooner than later.”