Bank mergers help cut funding costs, enhance pricing power
Merger and consolidation trend among banks in the UAE and other GCC countries will help better-position financial institutions with higher pricing power, and less pressure on funding costs, a report by Indosuez Wealth Management said.
Consolidation will also help banks increase their scale and revenue base, said Aabid Hanif, senior credit analyst at Indosuez Wealth Management Credit Pulse.
Most analysts are of the view that a new round of bank mergers - the fourth series of consolidation in the UAE's banking history - would serve to further consolidate the over-crowded financial system.
In September 2018, Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank announced the start of merger talks. And more recently, three other Abu Dhabi-listed Shariah banks - Bank of Sharjah, Invest Bank, and United Arab Bank - publicly denied media reports of another three-way merger.
"Taking into account the UAE market, the consolidation trend is fundamentally positive and will improve banks through increased pricing power as well lowering funding costs for banks. However, existing weaknesses, namely sizeable single name and sector concentrations, high levels of related-party lending, and asset-quality issues are still characteristics of banking in the Middle East and remain key features for creditors to look out for," said Hanif.
The potential three-way merger of ADCB, UNB and AHB will create an entity with approximately $113 billion of assets, making it the fifth-largest lender in the GCC and third-biggest in the UAE. Abu Dhabi has also merged several state investment funds, including Mubadala and Abu Dhabi Investment Council - the latter holding majority stakes in Abu Dhabi Commercial Bank and Union National Bank, potentially easing the progress of any merger, said Hanif.
The new round of bank merger is expected a year after the merger of the National Bank of Abu Dhabi and First Gulf Bank to create the Dh671 billion First Abu Dhabi Bank. "Such an entity will have an increased ability to meet sizeable investment requirements," analysts at Moody's said.
The ratings agency said bank competition in the UAE, where 50 banks serve a population of only nine million, has increased over recent years as lending opportunities decreased following a decline in economic and credit growth amid lower oil prices.
Emirates NBD, which came into being after the merger of National Bank of Dubai and Emirates Bank International in 2007, has assets of Dh477 billion while the merger of Dubai Bank and Emirates Islamic Bank led to the formation of Emirates Islamic Bank in 2012.
Bank competition in the UAE, where 50 banks serve a population of only nine million, has increased over recent years. Analysts believe consolidation will diminish the competitive pressure for funding. The competition for concentrated deposit sources, combined with the increase in US interest rates, is contributing to an increase in UAE banks' funding costs.
Analysts at BMI Research have warned that GCC banks were facing their toughest conditions since the global financial crisis this year, with the combination of lower oil prices, reduction in capital expenditure and increased drawdowns in government deposits squeezing liquidity and weighing on lending opportunities.