Middle East banks decide bigger can be better
While European banks have recently begun considering merger activity for the first time in a decade, in the Middle East the idea has never been off the table.
“There was always one combination or another being discussed”, says one senior figure in Dubai’s banking sector. The large number of banks — the UAE has more than 50 in a country of less than 10m people — meant “when and how was the only question”. Now, there appears to be an answer. Every country in the Gulf Cooperation Council, the regional trade bloc, has seen at least one bank enter discussions or agree a deal since the start of the year, and the trend is expected to continue.
Among the largest confirmed deals, Saudi British Bank and Alawwal Bank have finalised a $5bn tie-up, while International Bank of Qatar and Barwa Bank are merging after earlier discussions over a three-way combination with another local group failed. Several more are being discussed, including another three-way merger between Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank.
Some of the pressures encouraging consolidation in the region echo broader trends in the banking world. Emilio Pera, head of financial services at KPMG Lower Gulf, says increasing regulatory demands are “definitely a key factor”. Being forced to have higher capital levels and to strengthen areas like anti-money laundering controls reduces banks’ returns to shareholders, making it more attractive to share the load through combinations. Technological changes are also making scale more important. “With the competitive landscape broadened and increasing dependence on technology, it takes significant investment to remain competitive”, Mr Pera says.
There have also been important local changes. The sharp drop in oil prices after 2014 knocked economic growth and damaged banks’ profitability. Although prices have picked up since 2016, bankers say the experience has had an impact on shareholder attitudes.
Most banks in the GCC are at least partly owned by arms of their local states, and consolidation fits in with wider efforts to streamline their portfolios as oil becomes a less dependable source of long-term growth.
Karim Tannir, JPMorgan’s head of investment banking for Middle East and north Africa, says: “The decline in oil prices over the past few years has provided a strong impetus for governments to accelerate economic reforms and focus on diversification, value creation and optimisation of funding. As a result of these initiatives, we have seen an increased focus on capital markets and M&A activity on the part of government-related entities and sovereign funds.”
Despite the enthusiasm, there remain some limits to the trend. News of formal discussions is no guarantee that a deal will take place, and several attempted combinations have failed to get off the ground.
Christian Wiklund, head of M&A in Africa and the Middle East at Standard Chartered, agrees that further consolidation makes sense, but cautions that “there’s no external factor forcing it to happen — it’s not like they’re in crisis mode”.
Despite the slower growth, the region’s banks remain highly profitable. Net profits at the GCC’s 56 largest listed lenders increased by 6.7 per cent year on year in 2017, while capital levels were well above regulatory minimums and non-performing loans were just 3.2 per cent, according to analysis by KPMG.
In addition, cross-border deals such as Emirates NBD’s $3.2bn purchase of Turkey’s DenizBank are expected to remain rare.
“Management needs a lot of time to deal with this sort of big project,” said one senior Dubai-based investment banker. “They don’t do M&A every day so there’s a lot of hand-holding to be done . . . Stage one is these intra-economy deals. I hope we can get to stage two.”