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Saudi Aramco’s Ras Tanura oil refinery and terminal. Saudi Armaco’s acquisition of Sabic for $69 billion is the leading M&A deal this year. Image Credit: Reuters

Dubai: The banking sector would dominate mergers and acquisitions (M&A) in the Gulf, and in turn control a sizeable chunk of stock market activity, according to executives at JP Morgan.

M&A deals in the Gulf has touched $100 billion in the year to date, led by Saudi Armaco’s acquisition of Sabic for $69 billion. The announcement came days after Abu Dhabi Financial Group (ADFG) announced potential merger talks with Shuaa Capital, in which JP Morgan is advising the former.

JP Morgan advised on 14 M&A deals worth $13 billion out of the total of $56 billion deals announced last year. This included the merger of Alawwal Bank with The Saudi British Bank, with the deal size placed at $5 billion.

$13b

Value of M&A deals that were advised by JP Morgan last year

“The region has now tangible references of successful M&A case studies that have demonstrated what bigger and stronger players can achieve,” said Karim Tannir, joint Senior Country Officer for Mena and head of Mena Investment Banking at JP Morgan. “This was illustrated with the recent financial institutions consolidation we have witnessed.

“In terms of key M&A themes, we see particular focus on consolidation in the GCC banking landscape, cross-border investments, monetisation opportunities (including privatisation), as well as an increase in public market transactions.”

Banks in the UAE have been on the forefront of M&A activities. In January, Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank agreed to merge to create the third largest bank in the country with Dh420 billion worth of assets.

Then there is First Abu Dhabi Bank, which was the result of a merger between National Bank of Abu Dhabi and First Gulf Bank and creating the country’s biggest bank in terms of assets.

We see particular focus on consolidation in the GCC banking landscape, cross-border investments.

- Karim Tannir, Head of Mena Investment Banking at JP Morgan

Mergers have been driven by stability in oil prices along with corporates finding new paths to growth, “M&A and corporate bond issuance represented two large components of market activity last year and we believe they will continue to represent a significant part of the opportunity in 2019,” Tannir said.

The debt capital market is expected to maintain its level of activity, provided the US Federal Reserve maintains its dovish stance. Bond and sukuk issuances in the GCC remained at elevated levels at $78 billion last year compared to between $25 billion to $35 in 2014-15.

“Sovereigns are likely to continue to be the main drivers of supply in the region, and should represent a high percentage,” the official added. “As issuers continue to diversify their investor base, including sovereigns, we expect Islamic financing to further contribute to the supply we see.”

$78b

Bond and sukuk issuances in the GCC last year

Corporates, however, would continue to enjoy existing liquidity with financial institutions, he added.

On the equity front, JP Morgan expects activity to pick up in all products and inflows of $18 billion over the next 12 months due to the index’s inclusion in the MSCI and FTSE gauges.

“With low foreign ownership levels (sub 2 per cent) versus regional/CEEMEA peers ranging from 15 to 50 per cent of the total, Saudi Arabia is expected to take in two to three times the expected passive inflow from active investors globally,” said Khaled Hobballah, joint Senior Country Officer for Mena and head of Mena Markets at J.P. Morgan. This is “likely to continue to drive equity market outperformance in 2019 further widening the valuation gap with emerging markets over the period.”