Gulf banks’ takeover fever rising: Growth or cost motivated?

August 1, 2018 11:39 am


No one is raising the alarm over GCC bank performance despite concerns over the impact on balance sheets of the implementation of International Financial Reporting Standards 9 (IFRS 9).

The IFRS 9 introduces changes to the classification, measurement and impairment assessment requirements for financial and change the way in which banks and other financial institutions account for loan losses on their balance-sheets, imposing a longer, more forward-thinking view. GCC banks that are not ready could face non-compliance risks.

Also, the introduction of 5% VAT in Saudi and the UAE has not had a major impact on financial markets, buoyed by a recent rise in oil prices, which could lead to more deposits coming their way.

Still, as the Retail Banker reports, profitability remains an issue that is expected to weigh on the (GCC) banking segment throughout 2018 and into 2019.

“With rising overheads and limited means by which to further raise lending and earnings, banks must find ways to cut costs,” it said.

One such focus is mergers and acquisitions activity.

Video: Can SABB bank’s $5bn merger bid with Saudi Alawwal open doors to M&As?

Takeover deals

After a long lull, takeover deals between Gulf banks are kicking up a gear, according to Bloomberg.

Lenders across the region are undergoing their biggest shake-up since 2007, with almost a dozen of them involved in takeovers or mergers over the past two years.

“We will see more bank consolidation in the Gulf Cooperation Council, with most activity likely in the United Arab Emirates,” said Sergey Dergachev, who helps manage about $14 billion at Union Investment Privatfonds GmbH in Frankfurt.

“Compared to Saudi Arabia, the population in the U.A.E. is excessively banked with a few large banks and lots of smaller ones.”

There are at least 73 listed banks in the GCC, according to data compiled by Bloomberg. These lenders catered to a population of around 51 million at the end of 2016, according to data compiled by Gulf Research Center.

U.A.E. has 46 commercial banks for 9.5 million people and that does not include investment banks “offshore” in the Dubai International Finance Centre, while Saudi Arabia has 12 local lenders and 14 foreign-bank branches for 33.6 million people, according to central bank data and information from Worldometers.

“Higher compliance costs with the implementation of new accounting standards, rapid technological innovations, the impact of the introduction of value-added taxes and the need for stronger corporate governance frameworks are also adding to costs for banks, adding pressure on small- and medium-sized companies to consolidate,” said Bloomberg.

Read: What makes the UAE a M&A haven in the ME?

Kuwait Bank takeover

Kuwait Finance House KSCP wants to hold renewed talks with Bahrain’s Ahli United Bank BSC about a takeover, reported Bloomberg, valuing the Manama, Bahrain-based lender at $5.66 billion.

KFH has a market value of about $12.8 billion.

Bloomberg News in May last year reported that the banks began talks, aiming to create an entity with about $92 billion of assets.

Bank Dhofar and National Bank of Oman merger

Bank Dhofar and National Bank of Oman will discuss a potential merger that could create a new financial institution in Oman with $20 billion in assets, Gulf daily The National reported.

The board of Bank Dhofar gave the nod in its July 29 meeting and “resolved to commence discussions with National Bank of Oman to explore the possibility of a merger between the two entities”, the lender said in a regulatory filing to Muscat Securities Market, where its shares are traded.

“Cost efficiency is expected to improve with synergies between the two entities post-merger,” Hettish Karmani, the head of research at Muscat-based U Capital said.

Bank Dhofar at the end of the six months to June 30 had total assets of $10.9bn, while NBO had assets worth $9.36bn.

Read: Saudi leads mobile banking in region, MENA trails behind globally

Emirates NBD-DenizBank deal

In May 2018, Emirates NBD agreed to buy Turkish lender DenizBank from Russia’s Sberbank for $3.2bn, its biggest acquisition, a move aimed at expanding the bank’s market beyond the UAE.

The Dubai-listed lender will buy 99.9% of the Turkish bank, which is the fifth largest private bank in the country, Emirates NBD said in a statement.

“Through this transaction, Emirates NBD will establish itself as a leading bank in the Middle East, North Africa, and Turkey region and achieve meaningful diversification of its operations, both in new countries and in a broad range of business segments,” said Hesham Al Qassim, Emirates NBD vice chairman, and managing director.

Read: MENA M&A deal value drops 57.6% in 2017, with deal volumes consistent

FAB deal

Abu Dhabi lenders National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC last year merged to create or First Abu Dhabi Bank (FAB) with $175 billion of assets.

  FAB, now the UAE’s biggest bank by assets, reported a 19% year-on-year (yoy) rise in its second-quarter net profit, beating analysts’ estimates, as money set aside to cover bad debt declined and costs fell.

Net income for the three-month period ending June 30 rose to ($844 million), the lender said in a statement on Tuesday, and beating lower estimates of $780 million) of Egyptian investment bank EFG Hermes, according to Reuters data.

The bank’s group chief executive Abdulhamid Saeed said: “The FAB group’s performance was achieved on the back of healthy asset growth, and significantly lower risk and operating costs, as we continued to capitalize on solid asset quality and provision buffers, as well as substantial synergies realized from the merger.”

Rating agency Standard & Poor’s said in a report earlier this year that banks in the Gulf are bouncing back as loan growth gradually improves and provisions for troubled loans decline.

“The financial profiles of GCC banks are expected to stabilize further by the second half of 2018 as market conditions pick up amid an economic recovery,” S&P said.

Read: Has your UAE bank added the new fee cap to its website?

The Financial Times (FT) said last October that FAB, the $29bn “merger of equals” last year, would spark a wave of consolidation for the more than 100 banks in the Gulf Cooperation Council (GCC) region.

Al Ramz Capital analyst Maria Elena Ponceca singled out the UAE as ripe for consolidation. “With less than 11m people, the UAE is largely overbanked,” says Ms Ponceca. EFG Hermes analyst Shabbir Malik noted that “revenue growth for the sector is subdued and some banks lack the scale to compete effectively”.

Bahrain is even more intensively banked, with 79 “conventional bank licensees” and 24 Islamic bank licensees, according to a Central Bank of Bahrain register, FT reported.

More than 80% of the Gulf’s top 50 banks by assets are part-owned by arms of GCC states, according to financial advisory firm Acreditus.

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Hadi Khatib
By Hadi Khatib
Hadi Khatib is a business editor with more than 15 years' experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.



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