Why Gulf Banks Are Merging Like Never Before - EcoFinBiz Blog

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Why Gulf Banks Are Merging Like Never Before

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(Bloomberg) -- Lenders in the Persian Gulf have been rapidly consolidating as they seek to stay competitive in an era of lower oil prices. Saudi Arabia’s biggest bank announced talks about a mega-merger with a domestic rival less than a year after the kingdom’s first such tie-up in 20 years. Abu Dhabi is working on a merger of three of its banks, potentially the emirate’s second in just over a year. And the wave continues: About a dozen other regional lenders are involved in takeover or merger talks.

1. Why are banks merging?

Regional lenders are heavily reliant on government deposits, and those have been dwindling in sync with crude prices. At the same time, the six-nation Gulf Cooperation Council -- Saudi Arabia, Qatar, the United Arab Emirates, Oman, Kuwait and Bahrain -- is heavily over-banked. There are about 70 listed banks in the region, according to data compiled by Bloomberg, serving a population of around 51 million. Although hardly an exact comparison, there are only about a dozen listed banks in the U.K., a country of roughly 65 million people.

2. Where’s the most action been?

Abu Dhabi. The emirate’s largest lenders completed a merger in 2017 to create First Abu Dhabi Bank PJSC. A tie-up between Mubadala Investment Co. and the Abu Dhabi Investment Council in March created a sovereign wealth fund with about $220 billion of assets. Now, Abu Dhabi Commercial Bank PJSC and Union National Bank PJSC are in talks to merge with Al Hilal Bank. That would create a regional powerhouse with assets of about $110 billion. The trio share the same majority owner in Mubadala, so the combination should be a smooth one.

For more on Abu Dhabi’s consolidation drive, click here.

3. What’s the bigger picture?

Growth in banking assets is highly correlated with that of regional GDP, which moves largely in tandem with oil prices. Since 2014, the GCC countries have been hit by a sustained period of low crude prices, which has caused governments to re-calibrate budgets and dip into state deposits. Banks have also faced pressure from higher compliance costs because of new accounting standards, technological changes and the introduction of value-added tax.

4. What other mergers are happening?

Saudi Arabia’s landmark deal in May saw HSBC Holdings Plc affiliate Saudi British Bank agree to buy Alawwal Bank, which was backed by Royal Bank of Scotland Group Plc, in a $5 billion stock deal. A month later, JPMorgan Chase & Co. sold its 7.5 percent stake in Saudi Investment Bank to the Riyadh-based lender. Qatar has a far higher ratio of banks to citizens than the rest of the region, with 18 local and international lenders serving 2.7 million people. Talks on a three-way bank tie-up faltered in 2018 because of shareholder disagreements over the valuation, but two of the lenders -- Barwa Bank QSC and International Bank of Qatar QSC -- agreed in August to merge. In Oman, where the biggest lender controls close to 35 percent of all banking assets, two mergers are taking place.

5. Can we expect more deals?

It’s difficult to say. Bank mergers are complex and, given the large holdings by governments, highly dependent on political backing. While many discussions have started, only a handful have completed. That said, more regional banks may be forced to combine in order to stay relevant and as smaller lenders are threatened.

The Reference Shelf

  • A QuickTake on Saudi banking’s first merger in 20 years.
  • The quest for size has Gulf banks rushing to seal deals.
  • Which Saudi banks lead the pack and which are still making inroads?

To contact the reporter on this story: Archana Narayanan in Dubai at anarayanan16@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Paul Geitner, Grant Clark

©2019 Bloomberg L.P.

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