Banking merger momentum grows in the Gulf
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Banking merger momentum grows in the Gulf

The formation of First Abu Dhabi Bank, widely viewed as a success, has sparked a series of merger announcements. Will scale make for better performing banks? And could cross-border mergers in the region finally happen?


There can be little doubt about it now: the Gulf’s banking sector is consolidating. It has been a long time coming.

As far back as 2007, the merger of Emirates Bank International and National Bank of Dubai – to create Emirates NBD, Dubai’s largest bank – was widely expected to start a wave of similar deals across the region. With 46 commercial banks for a population of just nine million (not counting the banks in the Dubai International Financial Centre), the United Arab Emirates has long been exceptionally overbanked.

“It makes intuitive sense in the UAE,” says Ehsan Khoman, head of research and strategy for the Middle East and north Africa at MUFG. “It’s begging for more consolidation.”

The financial sectors of UAE’s neighbours are also densely packed. 

But with the oil price – and shareholder pride – running high, the appetite for consolidation remained low for close to a decade. The fall in the price of oil and political support for a transformation of the sector has changed all that.

The first sign of consolidation came with the merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD), which created the second largest bank by assets in the Middle East and north Africa, behind Qatar National Bank, and the largest in the UAE, ahead of Emirates NBD. That deal was agreed in July 2016 and became effective with the formation of First Abu Dhabi Bank (FAB) the following April.  

The reason [for consolidation] is primarily the incredibly high economies of scale that banks enjoy due to the fixed and high costs of infrastructure and technology - Elias Aractingi, Blom Bank

The two and a half years since have seen a deluge of merger announcements.

First came Qatar’s Masraf Al Rayan, Barwan Bank and International Bank of Qatar, announcing in December 2016 that they intended to merge, then Saudi British Bank and Alawwal Bank in Saudi Arabia in April 2017. A month later Kuwait Finance House (KFH) and Bahrain’s Ahli United Bank (AUB) announced their plan for a cross-border merger. 

Finally, in recent months, came news of Bank Dhofar and National Bank of Oman looking to combine forces, while, in the UAE, Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al Hilal announced their intention to bring their businesses together. 

Only the Qatari merger has fallen through so far, with the withdrawal of Masraf Al Rayan, but that has not shaken the resolve of the other two banks involved, which have now entered bilateral negotiations.

Emirates NBD, meanwhile, is buying Turkey’s DenizBank, as it looks to strengthen its position in the Gulf and beyond with a bold, if risky, diversification play.

“There is a push towards making more solid, more stable and more successful banks, clearly,” says Narjess Aschi, head of regional financial institutions corporate banking at Citi.

'Litmus test'

Observers say that banks looking to merge were waiting to see if First Abu Dhabi Bank was a success. Khoman says that FAB’s creation was “a litmus test” for the region.

FAB has managed to convince the market of its ability to thrive as a single unit. Its first annual report, for 2017, showed total assets of $182 billion and revenue of $5.3 billion, and, just as importantly, that the integration of the two banks was progressing swiftly. It says it is ahead of its own ambitious timeline in terms of achieving synergies. 

Narjess Aschi, Citi

Of the emerging wave of mergers, Aschi says: “I’m not surprised that [it is happening], now that the merger of NBAD and FGB that has formed FAB is well in place and actually has demonstrated a rather positive outcome and materialized a number of the synergy initiatives that it had planned for.”

Rahul Shah, head of financial equity research at the boutique investment bank Exotix, agrees. For him FAB’s formation was crucial to bankers and other decision makers in the region. 

“That does generate confidence that the process won’t have any negative, unintended consequences for the broader economy,” he says.

Banks across the region were ready to act once they saw a positive outcome was likely. As soon as FAB looked to be coming together as hoped, they announced their own consolidation plans.

“The reason is primarily the incredibly high economies of scale that banks enjoy due to the fixed and high costs of infrastructure and technology,” says Elias Aractingi, one of the general managers of Lebanon’s Blom Bank. “Increasing regulations and compliance costs are now exacerbating these economies of scale.”

Aractingi says that Gulf banks smaller than FGB and NBAD also see benefits in mergers. 

Elias Aractingi,
Blom Bank

“To survive as a smaller player,” he says, “you need to have a differentiating added value, as is the case for us in Egypt and Jordan because of our retail processes imported from Lebanon. Other medium-sized banks in the Middle East have relied on niche markets or powerful shareholders. 

“With time, however, and deteriorating economies, some of these advantages might erode and shareholders may be lured by the superior returns of larger banks. I think that’s what is taking place now in the region.”


Despite the crowded nature of the sector, banks in the Gulf have long had high returns. But when the oil price fell by 50% to around $50 a barrel in 2014, bankers felt a more immediate need for consolidation. Similarly, the rising cost of funding – not only in the Gulf but more broadly – makes mergers more worthwhile. 

Credit growth has also been slow in recent years in the Gulf, further justifying the formation of larger entities that might be better placed to extend loans. 

Some shareholders had long balked at the prospect of mergers, because they resented the idea of their institution being the “junior” participant in a merger or because they deemed the value attributed to their stakes insufficient. (Many in the region have excessive price expectations.) But, as Khalid Howladar, managing director of credit advisory firm Acreditus, puts it: “Fiscal pressures focused the mind.”

That Emirates NBD is seeking to enter Turkey – a notoriously difficult market – for as much as $3.2 billion shows just how urgent bankers believe the need for diversification to be.

Khalid Howladar,

“The good thing is, if you’re a Dubai bank, you’re actually no stranger to risk,” Howladar says of ENBD’s entry into Turkey. 

“Dubai can be quite a challenging market,” he says, referring to the UAE’s real estate and retail lending volatility.

“That said, going to an economy like Turkey, which is a very dynamic economy facing emerging-market pressures on currency and interest rates; what can a Gulf bank necessarily teach a Turkish bank in terms of managing interest-rate risk or currency risk? These are things they [Emirati institutions] don’t usually deal with,” he adds.

By joining up, smaller institutions find themselves with a stronger capital base from which to diversify, sectorally or geographically.

The pressure to develop new digital products and maintain cybersecurity also raises costs. Larger organizations are better able to cover such expenses.

“The cost of compliance and technology is quite – I wouldn’t say prohibitive – but to do it well is massively expensive,” says Howladar. “The smaller banks, even in terms of regulation and security, can’t necessarily keep up. And they’re the most vulnerable in a way. Are you [the regulator] going to make a bank spend tens of millions of dollars on an IT system it can’t afford?”

He argues that compliance and technology costs may in some cases be even greater drivers of consolidation than traditional reasons such as market reach and branch network.

State backing

It would be wrong, however, to think that the consolidation trend derives purely from economic considerations. In the Gulf, political control, both indirect and direct, means that for such strategic deals to take place, state backing is paramount.

“Of the top 50 banks [by asset size], 40 of them have some form of government shareholding,” says Howladar. “So, in that sense, any merger has to have political roots rather than economic shareholder-driven roots. That changes the dynamic. It’s not about one bank deciding that it wants economies of scale, looking around, finding another underperforming franchise and thinking: ‘I can take that over and do better with that’.

“Abu Dhabi is probably the best example of that. They’ve got this new political perspective of national champions. It’s that sort of political agenda around the region that is a bigger driver.”  

The eagerness to execute has remained. It’s really part of the broad reform of the market in the GCC and in Mena to a larger extent - Narjess Aschi, Citi

ADCB, UNB and Al Hilal – the latest banks to announce their intention to merge – share an investor, the Abu Dhabi Investment Council, an investment arm of the government of Abu Dhabi. The council holds 63% of ADCB’s shares, half of UNB’s and all of Al Hilal’s. That should ease the process of merging the three entities. 

It also highlights how supportive of banking mergers the highest levels of Emirati power are, as they push for the creation of new national champions in finance. 

Commonality of shareholder is also a driver behind other deals, such as the planned merger of KFH and AUB, which are both part-owned by Kuwait’s Public Institution for Social Security. 

Rahul Shah, Exotix

One advantage of sharing a stakeholder is that the banks are more likely to have similar banking philosophies and to understand each other’s business in detail. (A constant worry in mergers is that due diligence will not reveal all of the other side’s “skeletons”, as Shah puts it.)

Cost savings

Purely on its economic merits, the three-way Abu Dhabi merger makes sense insofar as it would cancel inefficient rivalries and cut costs.

“I don’t think they’re exactly similar,” says Aschi. “I’m sure they share certain principles and certain approaches, and appetite domestically, and clearly they complement each other in certain pockets. There is most likely a way to make cost savings by pooling together their infrastructures.”

There are differences, adds Aschi. Al Hilal is at a very different stage of its development, being both quite young and Shariah-compliant. ADCB, meanwhile, is a more balanced wholesale and retail bank. Finally, UNB is more relevant in the corporate space, she says. ADCB is about twice as large as the other two combined, so it would be expected to be the dominant force in any merged entity.

If it goes ahead, the new combined bank would be the fifth largest in Mena by total assets, giving Abu Dhabi two of the five top banks and making the emirate a formidable banking force in the region. 

The UAE as a whole would hold three of the top spots (with Emirates NBD), confirming its status as the primary banking hub in the region, although the emirati population’s size is dwarfed by that of neighbours such as Saudi Arabia and Jordan. Its dominance could become even greater if consolidation were to continue. 

“I wouldn’t be surprised if there were more UAE banks featured in that top 10 or top 15 over time,” Khoman says.

Some banks, such as QNB, may view this as overly skewed in the UAE’s favour. 

Ehsan Khoman,

“QNB are very mindful about anyone competing with them for the top spot,” says Khoman, who used to work as an economist at that bank. “I wouldn’t be surprised, if FAB grows its balance sheet or if there is another merger that makes it close to QNB at the top, for QNB to acquire more banks, because it is extremely competitive.”

Gulf leaders increasingly want national champions that can lead their banking sector at home and make a mark abroad. QNB has long pioneered this model, acquiring businesses from Africa to southeast Asia – and this is all the more important now, as its domestic market is now limited to Qatar, rather than to the Gulf Cooperation Council (GCC) countries, since the blockade imposed on the country by its neighbours.

As Howladar says, putting himself in the shoes of Emirati decision makers: “I don’t just want to be home to Emirates – one of the world’s biggest airlines by seat capacity – I want to have one of the world’s best financial institutions. We’ve got massive economic firepower: capital is the most important resource.”

The fragmented nature of the banking sector has undermined that objective in the past.


Gulf leaders appear not to have lost sight of their consolidation objective, even as the price of a barrel of oil has risen to over $80 – a level at which businesses reliant on state custom could start to breathe again. Apart from Bahrain, all of the Gulf states have a breakeven oil price of $80 or lower. 

“The eagerness to execute has remained,” says Aschi. “It’s really part of the broad reform of the market in the GCC and in Mena to a larger extent.”

The fact that the announced three-way Qatari merger was cancelled by Masraf Al Rayan but then relaunched with the remaining two banks highlights the will to get deals done. 

(Masraf Al Rayan is widely thought to be doing well as a standalone entity and the fact that it is publicly listed while the other two are not may have also added to the difficulties of combining the institutions.)

And there are other banks that, at least in principle, would work well together but have not announced merger talks. Among them are Oman’s Bank Nizwa and Alizz Islamic Bank, says Howladar, who points to the value of combining these young Islamic banks to cater to a growing market segment. In Dubai, a number of bank mergers have been rumoured, although none have yet materialized.

Nor are banks the only organizations that are merging. Abu Dhabi’s state investment companies Mubadala Development Company and the International Petroleum Investment Company joined up in 2016, and there is even talk of airlines Etihad and Emirates merging, although both firms have denied this. 

None of this is without risk. Entering Turkey is a perilous move for ENBD – the market is overbanked and volatile – as is already made clear by reports that the detail of the acquisition is being renegotiated in light of the fall of the Turkish lira. 

(This is the second time ENBD has faced such a problem, having dealt with devaluation in Egypt after entering that market in 2016 through its acquisition of BNP Paribas’s Egyptian business.)

There are also worries that banking mergers could lead to a high number of layoffs – a particularly pressing issue in a region where several countries, not least Saudi Arabia, are actively trying to reduce their unemployment rates. 

As for the specific risks associated with the announced mergers, KFH and AUB will have the challenge of managing a cross-border deal, the first in this wave of mergers. That union also presents the challenge of incorporating a fully Shariah-compliant bank, KFH, with one that is not, AUB.

“There is some scope for reputational risk if the Shariah compliance is viewed as important to the customer base,” says Shah.

In Abu Dhabi, the merger presents the same challenge, as Al Hilal is an Islamic bank and the other two are largely conventional.

Blom’s Aractingi notes that consolidation also has its own intrinsic risks. He says the resulting entities can be “too big to manage and become prone to internal politics, loss of focus and bureaucratic inefficiencies”. 

Richard Segal, senior analyst at Manulife Asset Management, says: “Merging is never easy, and it always takes long and is more complicated than is expected.”

In the short term, he says, the unexpected complications of merging institutions will supersede the positives. Still, Segal says, consolidation could deliver long-term advantages. He adds that it would give the region’s banks a level of international credibility that they have not previously had.

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