Merger wave across GCC banking sectors coming to an end

Dubai: The much-hyped cycle of bank mergers across the GCC region during the last two years is coming to a close, thanks to resilient financial performance by the region’s banks despite the slowdown in economic growth.

“Some market observers attribute this trend to the less supportive economic conditions since second-half 2014, when oil prices started to drop. However, the financial performance of the region’s banks has deteriorated only slightly in the past few years, benefiting from structural supports such as large non-interest bearing deposits and good efficiency,” said Mohamad Damak, credit analyst and global head of Islamic Finance at S&P Global.

S&P believes the reason for the current wave of bank mergers and acquisitions (M&A) in the region is the desire among banks with the same majority shareholders to further enhance efficiency, strengthen franchises, and boost pricing power.

Given the over-banked nature of some GCC banking systems, we think that further consolidation could help improve banks’ performance and financial stability. A new wave of acquisitions motivated by purely economic reasons could follow, but we think it may take longer to be realised.

Mohamad Damak | Credit analyst and global head of Islamic Finance at S&P Global

Indeed, most mergers to date have involved banks with common major shareholders. As such, the pool of banks with similar ownership is smaller, which will mean fewer M&A deals from now on unless economic reasons force the issue.

Based on their analysis of finalised or ongoing mergers in the past few years, S&P analysts believe that the presence of the same shareholders at the acquiring and acquired banks were key to the deals. For example, In the case of First Abu Dhabi Bank (FAB), the talks moved forward thanks to the presence of government entities on each side, along with some royal family shareholders.

Similarly, the Qatari government and royal family members helped facilitate the merger between International Bank of Qatar (IBQ) and Barwa Bank.

Going by the same logic, analysts said the presence of Saudi government-related entities on both sides of the table is likely to push ahead talks between National Commercial Bank and Riyad Bank.

“Given the over-banked nature of some GCC banking systems, we think that further consolidation could help improve banks’ performance and financial stability. A new wave of acquisitions motivated by purely economic reasons could follow, but we think it may take longer to be realised,” said Damak.

S&P analysts believe Gulf banks are generating healthy earnings, underpinned by low funding costs. This performance is thanks to the significant amount of non-interest bearing deposits in the funding profile, high efficiency, and manageable cost of risk.

While S&P analysts believe consolidation can help banks to develop their franchises, diversify their risk profiles, and strengthen capital generation through earnings, they foresee the merger wave ebbing across the region. They still see a few M&A opportunities in the UAE, particularly in Sharjah, Dubai, and Abu Dhabi.

However, analysts believe the ownership structures of the remaining banks, particularly in countries that they consider over-banked, mean there are limited opportunities for similar mergers to those seen in the past 24 months.

This is because a merger involving assets held by private-sector shareholders and governments, or government-related entities, does not appear plausible for now