Dubai: GCC’s banking sector has witnessed a flurry of mergers since 2017 and the sector is expected to see a few more large scale mergers as the economic growth and credit demand are slowing in the region according to banking sector analysts.

“Consolidation is being driven by a combination of lower oil prices, which have slowed economic growth, and stiff competition as numerous banks serve small populations. We believe the trend will be beneficial for the sector, boosting profitability through operational synergies and giving the banks greater pricing power,” said Ashraf Madani, a senior analyst at Moody’s.

The presence of unusually high number of banks and pressures on profitability have triggered the need for consolidation.

“For banking industry, M&A is a cost effective way to restructure the banking system by eliminating institutions that are perceived as inefficient and without adequate liquidity and strong asset bases, thus creating larger entities that are financially more robust and efficient, as they benefit from more economies of scale,” said M.R. Raghu, Director of Research at Markaz.

According Moody’s merger activity over the last 18-24 months involve both national level mergers and cross border mergers. National Bank of Abu Dhabi and First Gulf Bank merged in 2017 to create the UAE’s largest bank and was renamed First Abu Dhabi Bank. Another potential merger in the UAE, involving Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank’s in the pipeline. There is further activity in Qatar, Oman and Saudi Arabia but none has been finalised. A cross-border deal between Kuwaiti and Bahraini lenders Kuwait Finance House and Ahli United Bank are also in discussion.

In the past two decades, there have been very few mergers among local banks in the GCC. Majority of the M&A activity in the sector were in the form of cross border acquisitions to widen the geographic presence. Two of the biggest banking mergers took place in the UAE, nearly a decade apart from each other. Formation of Emirates NBD and First Abu Dhabi Bank were significant deals for the UAE, where on both occasions, the biggest bank in the country was formed.

Government role

Analysts say the environment for consolidation is stronger now than a decade ago. The fall in oil prices may be a significant trigger as more than 80 per cent of the Gulf’s top 50 banks by assets are part owned by arms of GCC states. Government of Saudi Arabia owns 20.3 per cent stake in Saudi Arabia’s largest bank National Commercial Bank) while its Public Investment Fund holds a 44.3 per cent stake. Qatar Investment Authority holds 50 per cent shares of Qatar’s largest bank Qatar National Bank. UAE’s largest bank First Abu Dhabi Bank 33.5 per cent is owned by the Abu Dhabi Investment Council.

“Becoming a bigger bank strengthens ties to the government through business flow. In addition, it increases their resilience to credit or liquidity risk. However, there are instances where larger banks are mandated to acquire smaller banks with poor asset quality due to common government ownership,” said Raghu.

In terms of composition of banking systems while UAE, Oman and Bahrain are deemed overbanked, Saudi Arabia has relatively few domestic banking institutions which points to a less likelihood of M&A activity in the country.

“GCC banking sectors are overbanked. Too many banks often serve small populations in the region. Many banking systems in the GCC are also dominated by a few large banks with a large number of smaller banks competing for the rest of the market,” said Nitish Bhojnagarwala, senior credit officer, Moody’s.