Will the “second wave” of M&A in the GCC banking sector continue to accelerate?

MORE than a year after the onset of the coronavirus pandemic, the Gulf banking sector is seeing an increase in mergers and acquisitions (M&A), as lenders continue to grapple with the economic fallout.

In fact, in May of last year, OBG predicted that Covid-19, combined with the associated fall in oil prices, would accelerate a trend of mergers and acquisitions among Gulf banks, with most institutions expecting a limited profitability despite good risk indicators.

A report released by S&P Global Ratings in March noted that the long-term adverse effects of the 2020 shock would likely be felt particularly hard in the United Arab Emirates, Oman and Bahrain, and less so in Saudi Arabia and Qatar, and that ‘A second wave of M&A could spread further in the region as the full impact of the gloomy economic environment becomes more visible.

The so-called second wave follows a previous wave of mergers and acquisitions in the region – mostly seen in the United Arab Emirates – triggered by the fall in oil prices in 2014.

A particularly iconic merger took place in 2019 with the largest merger in the MENA region to date, between Abu Dhabi Commercial Bank, Union National Bank and Abu Dhabi-based Islamic financial institution Al Hilal Bank. The merged entity became the UAE’s third-largest bank, with assets estimated at $ 114.4 billion.

Many analysts expected the Gulf banking sector to similarly respond to the coronavirus pandemic with increased mergers and acquisitions activity, as institutions seek to strengthen their resilience in the face of future crises.

Saudi Arabia leads the way

While much of the action has focused on the UAE, after two decades without bank mergers, Saudi Arabia has also seen two major developments in recent times.

In 2018, it was announced that Saudi British Bank and Alawwal Bank would merge. That decision was finally finalized in March this year, creating Saudi Arabia’s third largest bank.

Even more significant was the emergence of the Saudi National Bank (SNB), which officially began operations on April 1, becoming the Kingdom’s largest financial institution and a major regional player.

The entity was born out of the merger of two leading institutions, after the National Commercial Bank combined with the Samba Financial Group last year in a $ 15 billion deal.

With more than $ 239 billion in total assets and $ 34 billion in equity, the new entity has strong liquidity and strong capital buffers. In its first quarter of earnings, it posted net income of US $ 909 million.

The SNB claims expansive strategic plans: according to the global rating agency S&P, it “will radically change the landscape of corporate loans” both in the Kingdom and more broadly in the region. The new entity will finance economic development and support Vision 2030, as well as the expansion and deepening of trade and capital flows between Saudi Arabia and the rest of the world.

Another important objective of the SNB will be to foster the transition to digital banking which has been accelerated by Covid-19, by offering a range of digital services and products to individuals, small and medium-sized businesses and businesses.

Qatar sees important rapprochement

Qatar has also seen significant activity in terms of mergers and acquisitions in the aftermath of the spread of Covid-19 in the region.

Masraf Al Rayan announced a potential merger with Al Khaliji Commercial Bank on June 30 last year – an announcement that caused Al Khaliji’s shares to skyrocket.

On January 7 of this year, the Qatar Financial Markets Authority confirmed that it had approved the merger, creating Qatar’s second-largest lender – even though it is still six times smaller than Qatar National Bank – and the one of the largest Sharia-compliant ones in the region. groups.

As in the case of the SNB, the new entity is in a strong financial position with strong liquidity and is expected to contribute to the implementation of the Qatar National Vision 2030.

The future of mergers and acquisitions in the Gulf banking sector

With the Covid-19 pandemic gradually being brought under control around the world, will this second wave of mergers and acquisitions continue?

The S&P report released in March claimed that 2020 saw the region’s banks struggle with a ‘triple shock’ to profitability, resulting from ‘weaker loan growth, lower interest rates for longer and longer. a higher cost of risk ”.

Although the situation seems to be improving in the second half of 2021, the residual effects of this triple shock will probably push many banks to strengthen their resilience by consolidating with other entities. The report also argued that the ongoing second wave could also spur an increase in cross-border mergers and acquisitions, although it noted that this “would require more aggressive management action than seen previously.”

Another factor is the proliferation of banks in the region.

Indeed, a report released by Moody’s last year noted that the push towards consolidation has been felt particularly keenly by smaller banks who risk being “crowded out” by their larger peers.

Likewise, in March, a report released by consultancy firm Alvarez & Marsal said the UAE’s banking sector would see an increase in M&A activity.

The United Arab Emirates has long been viewed as overbanked; At present, there are 21 local banks and 27 foreign banks serving a population of less than 10 million people.

While various factors explain to some extent the profusion of banks in the UAE – for example, the fact that they are made up of seven separate emirates – this figure suggests that it is possible to thin the ranks.

Elsewhere, the planned acquisition of Ahli United Bank of Bahrain, its largest financial institution, by Kuwait Finance House has been postponed due to the pandemic, and no timetable has yet been announced for its continuation. If this merger and acquisition goes as planned, it would create the GCC’s sixth bank, with more than $ 100 billion in assets.

It is also significant that this merger would transform Bahrain’s largest bank into a Sharia-compliant institution, a sign of continued growth in the segment.

This piece was produced by the Oxford Business Group.

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