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Asset management

UAE’s three-way bank merger: A positive for the industry

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Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) and Al Hilal Bank are in the preliminary stages of exploring a potential merger

editor's pickSunday 02, September 2018

A wave of consolidation among banks in the Gulf is returning to Abu Dhabi. Three UAE banks, state-owned Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) as well as Shari’ah-compliant Al Hilal Bank, confirmed the possibility of the creation of what is going to be the fifth largest bank in the Middle East. The three banks announced in early September that talks are underway to combine into one entity with $110 billion of assets, according to a bourse filing by Abu Dhabi Commercial Bank (ADCB). The negotiations follow a trend that began with a tie-up between Abu Dhabi’s two biggest banks resulting in the creation of First Abu Dhabi Bank (FAB) in 2016, and the merger of sovereign wealth funds, International Petroleum Investment Company (IPIC) and Mubadala Development Company (MDC) last year.

The merger which was confirmed by all the involved lenders has been welcomed as a positive development in the industry. Bank mergers is believed to be are part of a broader strategic shift on the part of Abu Dhabi’s authorities to prepare for a future where oil’s global dominance is set to die down, especially as electric cars become the norm over the next two decades. The UAE, home to six per cent of global crude reserves has stepped up efforts to create leaner and more competitive financial institutions. A tie-up between the three lenders is subject to approvals from the banks’ boards of directors, shareholders and regulators.

Compared to Saudi Arabia which has 28 lenders catering for 33 million people, the UAE has around 60 banks serving a population of about nine million and competition has intensified in recent years between banks—as lending opportunities have dropped due to a slowing economy and credit growth owing to lower oil prices.


In a report by Moody’s, the merger of ADCB, UNB and AHB would contribute to the consolidation of the over-banked UAE banking sector, which will increase banks’ pricing power, reduce pressure on their funding cost and increase their ability to meet sizeable investments. The stronger competition between lenders in the UAE reflects the industry’s focus on high-quality borrowers given elevated delinquencies among small and medium companies and mid-sized corporates amid a soft environment, along with the introduction of a credit bureau. According to Moody’s, the competition for concentrated deposit sources and the increase in US dollar interest rates are contributing to an increase in UAE banks’ funding costs.

Rising US interest rates have historically translated into higher dirham rates in the UAE when pegged to the US dollar. Therefore, consolidation of the banking system will also ease the competitive pressure for funding. UAE banks’ increasing competitive pressures and funding costs have both contributed to lenders’ contracting net interest margins. Additionally, system consolidation will also increase banks’ scale and revenue base, improving their ability to meet sizeable investments related to compliance, digitalisation and new accounting standards such as IFRS 9, Moody’s said. Emilio Pera, Partner and Head of Audit, KPMG Lower Gulf, said that there has also been discussion on a potential merger between InvestBank and Bank of Sharjah, a transaction that will also provide more critical mass to two key banks in this Emirate.

Pera added that the benefit to facilitate this transaction is also the fact that all three entities are owned by a common majority shareholder ADIC. “The notice of the potential merger of the three Abu Dhabi headquartered banks (ADCB, UNB and Al Hilal) drives further consolidation in the capital. Abu Dhabi is a market where top-line growth is pressured and there are more challenging regulatory (prudential and conduct) and capital demands. This together with increased competition from other banks who are introducing more innovative and technology-enabled solutions to the market make consolidation inevitable, and therefore not surprising,” explained Pera Given that synergies can be drawn from the combined entity, whilst providing a stronger asset base to more effectively compete in the market, it will extract shareholder value.

“ADIC currently owns 62.5 per cent of ADCB, 50 per cent of UNB and 100 per cent of Al Hilal Bank. We view that a three-way merger could release long-term value through economies of scale, synergies and overall restructuring for ADIC,” said Ehsan Khoman, MUFG’s Head of MENA Research and Strategy, in a recent market commentary. A tie-up will make sound business rationale for ADIC as it would merely own a more profitable combined banking group after cost restructuring has been implemented, which will in turn lead to surplus capital release, reduce the cost of funding and enhance asset quality. Analysts see this three-way merger scenario as multi-faceted, but a share swap will be the most probable mechanism to fund a potential transaction against a pure cash acquisition, as the presence of ADIC would likely support a share swap as it will preserve the shareholder’s ownership in the new entity created.

Across the Gulf

The merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) to create FAB in July 2016 created a wave of consolidation in the banking sector across the Gulf region. The structural characteristics of UAE banks and financial institutions in the region as a whole, are a diverse mix of conventional and Islamic entities, as well as being both retail-focused and corporate-aligned in their stance which from a potential future merger perspective will offer value-added consolidations. MUFG MENA Research forecasts better asset pricing discipline as banks merge with lower concentration risks in loan portfolios. The second quarter of 2018 has also seen several potential bank synergies in the region.

In July Kuwait Finance House (KFH) invited Bahrain’s Ahli United Bank to begin a due diligence process for a potential merger. In a bourse filing, KFH said that the scope of the agreement includes valuation studies and work to assess the feasibility of establishing a new banking entity and it would disclose any matters related to the possible merger in a sequential and timely manner. Additionally, in the same month Bank Dhofar and National Bank of Oman announced plans for a potential merger and according to EFH Hermes the merged bank, with a combined asset of $20 billion (AED 74 billion) will be the second-largest financial institution in Oman after Bank Muscat. HE Abdullah bin Salim al Salmi, the President of CMA, said that Oman needs bigger and stronger institutions not only in financial sector but in all the corporate sectors, adding that that too many small players in Oman’s corporate sector will not be able to compete regionally and internationally as they will need to sustain their growth.  

TAGS : UAE, ADCB, MDC, FAB, NBAD, FGB, Ahli United Bank, KFH, UNB, Al Hilal

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