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Skip Navigation LinksHome :: Back Issues :: Banks feel little urge to merge

May 2000

Banks feel little urge to merge


The aborted merger of two Gulf banks is a blow to regional consolidation, but it is only delaying the inevitable, as financial markets open up to foreign competition reports Nigel Dudley




       
Ibrahim Dabdoub
Most analysts and senior bankers in the Middle East have agreed for more than a decade that the region needs fewer banks. And they have argued that those remaining must be either large enough to compete with international financial institutions, in providing the services demanded by corporate customers, or be small banks targeted at niche sectors.
Even though some mergers have taken place - most notably the first major cross-border deal last year which brought together the Bahrain-based Gulf International Bank (GIB) and the London-based Saudi International Bank (SIB) - neither of these goals is anywhere near being achieved. Any expectations that this long overdue restructuring had finally begun in earnest were dealt a heavy blow with the recent announcement that the proposed merger between the National Bank of Dubai (NBD) and Emirates Bank International (EBI) had fallen through.
This failure has drawn a caustic, though resigned response, from many bankers in the region and led to warnings that the region's institutions could be vulnerable to international banks creaming off the best business by offering all their services through the internet for which they do not need a local presence.
"The dilatory response to this challenge is symptomatic of the inability of those entrusted with the responsibility for the region's institutions to take fundamental decisions to reform one of the key sectors of the economy", says one London-based Arab banker.
Had the negotiations succeeded, it would have been the most significant development in Middle East banking for many years. It would have been effectively the first merger of equals in the Gulf, almost certainly have prompted other banks to follow suit and would have demonstrated that Middle East banks with very different management cultures could merge. With the Dubai government owning 80% of EBI and a minority stake in NBD, it would also have shown the government's determination to reform the sector.
The merger, which would have created the dominant bank in the UAE, was first discussed at last autumn's IMF/World Bank meeting, with NBD's chairman Sultan al-Owais regarded as the driving force. Since his death in January this year, it has become clear that there was more enthusiasm among EBI's top management than at NBD. The merger committee, comprising representatives of both banks, never met and the discussions were eventually shelved in mid April.
"It could have worked had both sides been fully committed. But they came from different banking cultures. EBI was formed from a series of mergers and has expanded using the same strategy so it is used to these sorts of negotiations. NBD had never been involved in anything like this before. Moreover, while the government gave its blessing, it was scarcely a driving force in the process," said one banker close to the negotiations.
       
Some Kuwaiti banks do little
real banking
This setback has, say bankers, only delayed the inevitable. More Arab countries are joining the World Trade Organisation, which requires the opening up of domestic financial markets to outside competition. And the need for massive investment in the technology needed for modern banking, will force Arab banks to consider mergers or strategic alliances.
"All banks in the emerging markets will have the problem of globalization and greater competition and will have to decide how they meet the challenge", says Ibrahim Dabdoub the veteran chief executive of the National Bank of Kuwait (NBK).
The more sanguine among them believe that within 15 years there will only be room for as few as half a dozen large Arab institutions and a few niche banks. "In a liberalized global financial market, Arab banks have no choice but to consolidate. This would reduce operational costs, minimize duplication, spread huge technology expenses over a wider base and allow banks to benefit from economies of scale", says Henry Azzam, chief economist at the Beirut investment bank, the Middle East Capital Group.
Bankers point out that the Middle East banking has come a long way in barely a quarter of a century. Its leading institutions are internationally respected and there is a new generation of extremely efficient managers. But another revolution is needed to catch up with the changes in western banking and this requires major structural reforms. John Finigan, general manager and chief executive of Qatar National Bank, told a recent conference in Doha: "Among the measures needed are domestic consolidation to increase overall effectiveness, regional expansion to heighten focus on intra-GCC [Gulf Cooperation Council, whose members are Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates] capital flows, regional alliances to enhance the size of capital commitments, regional collaboration in technology to reduce capital costs of development and international alliances in areas such as asset management, custody and information technology outsourcing."
He also called for "greater collaboration to enhance intra-regional capital flows, the creation of more transparent domestic money market instruments, a broader securities market capability and the creation of regional syndications with GCC banks playing the leading role".
The clearest evidence of the size of the task facing Arab banks comes from the cost to income ratio - the traditional measure of banking efficiency. The Middle East has comfortably the lowest level with a 47% ratio. This compares with 85% in Japan, 67% in Latin America, 61% in the European Union, 60% in Asia and 58% in the United States.
"Within the Middle East, all countries have ratios below 60%, which is considered to be a healthy level," says Azzam. "The leading banks in Saudi Arabia and Jordan have the highest ratios of nearly 60% due to their substantial investment in new technology, while those in Qatar, Kuwait and the UAE have the lowest levels, between 30-40%."
Just as significantly domestic Arab banks are small compared to those in Europe and the US. National Commercial Bank (NCB) of Saudi Arabia, the largest Arab bank in terms of equity, ranks only 160th among the world's banks. At the end of 1998, only two, NCB and the Bahrain- based Arab Banking Corporation (ABC) had assets of more than $20 billion, while the combined assets of all Arab banks - at just under $500 billion - was less than that of several of the world's largest banks. Few can justify the need for the UAE to have 20 banks, most of which are solely focused on one small emirate while, in Kuwait, some banks have admitted privately to doing scarcely any conventional banking business at all.
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