Will the “second wave” of mergers and acquisitions in GCC banking continue to gather pace?

More than a year after the initial onset of the coronavirus pandemic, the Gulf banking sector is seeing an increase in mergers and acquisitions (M&A), as lenders continue to deal with the economic fallout.

In fact, in May last year OBG anticipated that Covid-19, combined with the associated crash in oil prices, would accelerate a trend towards M&A among Gulf banks, with most institutions expecting constrained profitability despite performing well in risk indicators.

A report published by S&P Global Ratings in March noted that the long-lasting adverse effects of the 2020 shock are likely be felt particularly keenly in the UAE, Oman and Bahrain, and less so in Saudi Arabia and Qatar, and that a second wave of M&A could sweep further across the region as the full impact of the subdued economic environment becomes more visible.

The so-called second wave follows an earlier run of M&A in the region – seen most prominently in the UAE – triggered by the 2014 oil price slump.

A particularly emblematic tie-up came in 2019 with the MENA region’s largest merger to date, between Abu Dhabi Commercial Bank, the Union National Bank and the Abu Dhabi-headquartered Islamic finance institution Al Hilal Bank. The merged entity became the UAE’s third-largest bank, with an estimated $114.4bn in assets.

Many analysts expected that the Gulf banking sector would likewise respond to the coronavirus pandemic with increased M&A activity, as institutions seek to strengthen their resilience against future crises.

Saudi Arabia leads the way
While a large slice of the action has been focused on the UAE, after two decades with no bank mergers, Saudi Arabia has also seen two major developments in recent times.

In 2018 it was announced that Saudi British Bank and Alawwal Bank were to merge. This move was finally tied up in March this year, creating Saudi Arabia’s third-biggest bank.

Even more significant has been the emergence of the Saudi National Bank (SNB), which formally began operations on April 1, becoming the largest financial institution in the Kingdom and a major regional player.

The entity was formed out of the merger of two leading institutions, after the National Commercial Bank last year combined with the Samba Financial Group in a $15bn deal.

With over $239bn in total assets and $34bn in shareholder equity, the new entity boasts strong liquidity and capital buffers. In its maiden earning quarter, it posted net income of $909m.

The SNB boasts expansive strategic plans: according to global ratings agency S&P, it will “sharply change the landscape in corporate lending” in both the Kingdom and more broadly region. The new entity will finance economic development and support Vision 2030, as well as expand and deepen trade and capital flows between Saudi Arabia and the rest of the world.

Another important focus of SNB will be to nurture the shift towards digital banking that has been accelerated by Covid-19, offering a range of digital services and products to individuals, small and medium-sized enterprises and corporations alike.

Qatar sees significant tie-up
Qatar also saw some significant activity in terms of M&A in the immediate aftermath of Covid-19’s spread around the region.

Masraf Al Rayan announced a potential merger with Al Khaliji Commercial Bank on June 30 last year – an announcement that sent Al Khaliji’s shares soaring.

On January 7 this year the Qatar Financial Markets Authority confirmed that it had approved the tie-up, creating Qatar’s second-largest lender – even if it is still six times smaller than Qatar National Bank – and one of the region’s largest Shariah-compliant groups.

Similarly to the case of the SNB, the new entity is in a strong financial position with robust liquidity, and is expected to help drive Qatar National Vision 2030.

The future of M&A in Gulf banking
With the Covid-19 pandemic being gradually brought under control around the world, will this second wave of M&A continue?

The S&P report published in March argued that 2020 had seen the region’s banks grapple with a “triple shock” to profitability, stemming from “lower lending growth, lower-for-longer interest rates, and higher cost of risk”.

Although the situation appears to be improving in the second half of 2021, the residual effects of this triple shock will likely push many banks to enhance their resilience by consolidating with other entities. The report also argued that the ongoing second wave could also spur increased cross-border M&A, although, it noted that this would “would require more aggressive moves by management than seen previously”.

A further factor is the proliferation of banks in the region.

Indeed, a report published by Moody’s last year noted that the impulse towards consolidation was felt particularly keenly by smaller banks which risk being “crowded out” by larger peers.

Similarly, in March a report published by consulting firm Alvarez & Marsal said that the UAE banking sector was set to see an increased amount of M&A activity.

The UAE has long been seen as overbanked; at present, there are 21 local banks and 27 foreign banks serving a population of fewer than 10m people.

While various factors go some way towards explaining the profusion of banks in the UAE – for example, the fact that it is made up of seven distinct emirates – this figure suggests that there is scope for some thinning of the ranks.

Elsewhere, the planned acquisition of Bahrain’s Ahli United Bank, its largest financial institution, by Kuwait Finance House, was postponed due to the pandemic, and as yet no timeline has been announced for its continuation. If this M&A goes ahead as planned, it would create the GCC’s sixth-largest bank, with over $100bn in assets.

It is also significant that this tie-up would transform Bahrain’s biggest bank into a Shariah-compliant institution, in a sign of continued growth of the segment.