October 7, 2020 banking

Covid, low oil prices set to trigger new wave of GCC bank mergers

A new wave of banking sector mergers is in the offing in the GCC with banks seeking ways to combat revenue pressure in the wake of the coronavirus crisis and prolonged low oil prices, according to financial experts.

'The banks now face larger cost adjustments as low oil prices and the coronavirus fallout constrain growth opportunities and severely dent their profitability,' said Badis Shubailat, analyst at Moody's Investors Service. 'This is prompting a new wave of mergers as banks seek ways to combat revenue pressure.'

Pressures building from the oil price and pandemic shocks will increasingly drive purely financially driven transactions, particularly among smaller banks crowded out by larger competitors, the rating agency said.

New merger deals will be increasingly motivated by purely financial considerations. 'Bank consolidation in the GCC region has so far largely involved shareholders (typically the government and related entities) consolidating their positions in different banks amid weakening operating conditions,' Moody's said.

One of the upcoming mergers is expected to be between two Saudi banks, National Commercial Bank and Samba, the merger will have far-reaching effects on the financial landscape within the kingdom. The new entity would have a 30 per cent market share of Saudi's banking assets, double that of its nearest challenger, Al Rajhi Banking & Investment Corp. The deal will result in a combined entity with total assets of $213.12 billion, according to S&P Global Market Intelligence data, and it will create the third-largest bank in the GCC by assets

The UAE has been a trend-setter in banking sector mergers. Starting with the merger of Emirates Bank and the National Bank of Dubai to form Emirates NBD in 2007, the UAE set the trend and kept the momentum with the creation of First Abu Dhabi Bank through the merger of National Bank of Abu Dhabi and First Gulf Bank in 2017. In May 2019, Abu Dhabi Commercial Bank merged with Union National Bank in May and the new entity took over Al Hilal Bank as its Islamic arm. Dubai Islamic Bank was the latest to join the M&A spree, when it fully acquired Noor Bank in January.

'The twin challenges of the pandemic and protracted low oil prices will hit banks' profitability through slower credit growth, slimmer net interest margins and higher provisioning for bad loans. The revenue shock will shift management attention to cost discipline and consolidation opportunities. Mergers and acquisitions will remain a recurring credit theme over coming years,' said Moody's analyst.

The GCC banking sector has been undergoing a major consolidation phase with 20 banks negotiating mergers and acquisitions with an estimated $1 trillion worth of assets even months before the epidemic outbreak.

The UAE had been leading the drive with the highest number of mergers both in terms of value and volume. In 2019, six mergers and acquisitions were being negotiated in the UAE worth $625.25 billion and two in Saudi Arabia worth $256 billion and one each in Kuwait and Oman.


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