Gulf’s economic conditions ripe for more bank mergers

Economic challenges faced by the region in the wake of lower oil prices lowering the growth outlook has given rise to calls for the creation of a more efficient banking sector in the GCC.

Bank mergers in the GCC are becoming easier than in the past, thanks to the changed economic environment, say analysts.

“Completion of bank mergers in GCC countries has historically proven challenging due to shareholders’ high pricing expectations and the healthy profitability of banks in the region. However, lower economic growth following the decline in oil prices mid-2014 is gradually driving consolidation in the over-banked region,” said Moody’s recently.

While talks on the merger of Abu Dhabi based banks such as Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al Hilal Bank (AHB) are still at an exploratory level, analysts said a potential three-way merger is made easy because the three banks have some common shareholding. Abu Dhabi Investment Council holds a 63 per cent stake in ADCB, 50 per cent in UNB and 100 per cent in AHB.

Challenges

“Abu Dhabi is a market where top-line growth is pressured and there are more challenging regulatory (prudential and conduct) and capital demands. This together with increased competition from other banks introducing more innovative and technology-enabled solutions make consolidation inevitable, and therefore not surprising,” said Moody’s.

Consolidation is widely seen as positive for the UAE banking sector, as long-term benefits outweigh shortterm challenges. “Larger banks in a consolidated system will enjoy scale benefits, leading to better diversifications of risks, stronger overall profitability, and contributing to higher credit ratings. Smaller banks will be more capable of absorbing systematic shocks,” said Aarthi Chandrasekaran, vice-president of Shuaa Capital.