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GCC bank mergers to ease overcapacity, says Moody's

Recent merger and acquisition drive among GCC banks, stoked by slow growth and subdued credit demand in the region, will help the sector by easing overcapacity and boosting profitability, Moody's said.
In a latest report, Moody's Investors Service says mergers will ensure that the banking sector would benefit through synergies and increased pricing power.
In the UAE, mergers talks are underway among local banks following the successful merger of the National Bank of Abu Dhabi and First Gulf Bank in 2017 to create the Dh671 billion First Abu Dhabi Bank.
Analysts believe that merged entities will have an increased ability to meet sizeable investment requirements.
In the UAE, the latest round of bank merger talks - the fourth series of consolidation in the UAE's banking history - have been under way since September 2018. The three-way merger process involves Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank.
Recently, three other Abu Dhabi-listed Shariah banks - Bank of Sharjah, Invest Bank, and United Arab Bank - publicly denied media reports of another three-way merger.
The Moody's report, "Banking - Gulf Cooperation Council: Consolidation among GCC banks will boost profitability," said the overcrowded banking sector in the GCC has seen a wave of mergers and acquisitions announcements in the last year, as falling oil prices hit government budgets, slowing economic growth.
"Slow growth and subdued credit demand in the region is one of the biggest drivers of consolidation," said Ashraf Madani, a Vice President and Senior Analyst at Moody's. "This has intensified competition for depositors and borrowers, dampening profits at GCC banks."
The GCC banking sector has many banks serving small populations, driving intense competition and aggressive pricing policies.
For example, in Oman, where two potential mergers have been announced, there are 20 licensed banks serving a population of 4.6 million people. This compares with Saudi Arabia where only 27 banks serve a population close to 33 million.
Consolidation will help stem rising funding costs and improveprofitability in the long run. Despite integration challenges in the early stages, merged banks will gain market share, have better pricing power and cost synergies.
Analysts said the consolidation trend is fundamentally positive and would improve banks through increased pricing power as well lowering funding costs for banks. However, existing weaknesses, namely sizeable single name and sector concentrations, high levels of related-party lending, and asset-quality issues are still characteristics of banking in the Middle East and remain key features for creditors to look out for.
The potential three-way merger of ADCB, UNB and AHB will create an entity with approximately $113 billion of assets, making it the fifth-largest lender in the GCC and third biggest in the UAE. Abu Dhabi has also merged several state investment funds, including Mubadala and Abu Dhabi Investment Council - the latter holding majority stakes in Abu Dhabi Commercial Bank and Union National Bank, potentially easing the progress of any merger.
According to the ratings agency, bank competition in the UAE, where 50 banks serve a population of only nine million, has increased over recent years as lending opportunities decreased following a decline in economic and credit growth amid lower oil prices.
Emirates NBD, which came into being after the merger of National Bank of Dubai and Emirates Bank International in 2007, has assets of Dh477 billion while the merger of Dubai Bank and Emirates Islamic Bank led to the formation of Emirates Islamic Bank in 2012.
- issacjohn@khaleejtimes.com