Dubai: Bankers expect a smooth merger between National Bank of Abu Dhabi (FGB) and First Gulf Bank (FGB) could trigger a wave of banking sector mergers in the UAE and the GCC region, significantly improving the size and scale of the region’s banking sector.

One of the biggest mergers in the local market took place when Emirates Bank International and National Bank of Dubai merged in 2007 to create Emirates NBD, Dubai’s largest bank.

In 2009, two other Dubai-based banks, Dubai Bank and Emirates Islamic Bank (EIB) merger into one and was later rebranded as Emirates Islamic. The combined entity is owned by Emirates NBD Group.

Although multilateral institutions such as the International Monetary Fund (IMF) and institutions like Institute of International Finance (IIF) have favoured banking sector mergers in the UAE and GCC in the context of relatively large number of banks serving small target markets, the sector has remained elusive to M&A activity.

Analysts say a large deal like the merger between NBAD and FGB could encourage more such deals. “A merger of FGB [key shareholders are Mubadala and UAE ruling family] and NBAD [controlled by ADIC with 69 per cent] may also force others, most likely Abu Dhabi based banks to look at mergers, and ADCB could team up with UNB (both controlled by ADIC), but the fit is less obvious to us, however, UNB does offer a very attractive entry point for any acquirer,” Japp Meijer — Arqaam Capital.

Vijay Harpalani, fund manager at Al Mal Capital, said that consolidation in the UAE’s banking industry was “long overdue” adding that the potential merger has hopefully kicked off a wave of consolidation in the industry.

“The banking industry will benefit from consolidation in the long term. Presently, circa 50 banks fiercely compete in a market where credit penetration in quite high and macro outlook is challenging, resulting in lower margins. The room for meaningful growth for 50 banks is very limited amidst challenging macro headwinds. Consolidation is one way of addressing this issue,” he told Gulf News.

Market share erosion

In the past there were talks about a potential merger between FGB-UNB, with an acquisition of UNB offering scope to bolster the capital base of FGB. “Similarly a merger between ENBD and UNB would have its merits, thanks to ENBD’s very strong deposit franchise (which UNB lacks), while UNB (also partly owned by Dubai government) has deep pockets after years of market share erosion on uncompetitive pricing and would substantially increase the single party limit after hoarding capital due to a low payout ratio. But the chances for the latter are low, and we see ENBD remaining in the hands of the Dubai government,” said Meijer.

Shares in NBAD surged to a three-month high in early Sunday trading, after the bank confirmed news reports it was in merger talks with FGB.

If completed, the merger of the UAE’s two largest banks by market capitalisation would create an entity with assets of around $170 billion, surpassing Qatar National Bank to become the largest bank in the Middle East.

Box: Credit Suisse and UBS advise NBAD and FGB

Credit Suisse Group AG and UBS Group AG, which have scaled back from the Gulf since the financial crisis, are advising on the potential merger of Abu Dhabi’s two largest banks, according to people with knowledge of the matter.

Credit Suisse is advising National Bank of Abu Dhabi PJSC on the combination while UBS is working with First Gulf Bank PJSC, said the people, asking not to be identified because the information is private. Credit Suisse, NBAD and FGB declined to comment, while a spokesman for UBS was not immediately available for comment.

Bloomberg