GCC Bank M&A Surge Unlikely, Despite Market Conditions

A surge in mergers and acquisitions among banks in Gulf Cooperation Council (GCC) countries is unlikely due to structural impediments, despite market conditions that appear conducive and numerous rumors about potential deals, Fitch Ratings says.

We believe tie-ups will be largely limited to those that create leading domestic market players or allow shareholders to realise value immediately upon the inception of the merger.

Banks across the region are facing pressure on profitability and tighter liquidity, especially in countries where public sector deposits have been withdrawn from banks to shore up government finances weakened by lower oil prices. The UAE (which has about 50 banks), Bahrain and, to some extent, Oman would benefit from consolidation as many banks in these countries lack sufficient scale.

But while these conditions might increase motivation for M&A and some banks are discussing potential deals, we believe shareholder appetite will be limited, given the banks’ sustained solid profitability and the prevalence of large private local shareholders in some GCC countries.

Some countries have only a small number of local banks, which limits competition. This means that profitability, although down, has remained solid despite the macroeconomic pressures and is therefore less likely to be a driver for M&A. Saudi Arabia has only 12 local banks; Qatar and Kuwait each have only 11.

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The ownership structure of GCC banks is also a stumbling block to M&A approvals – well established local private shareholders often control sizeable stakes and foreign banks only hold minority stakes. Cost savings are often put forward to support deals but these are rarely sufficient to convince shareholders, as cost-cutting in the GCC is difficult, and shareholders tend to have shorter-term objectives such as cash realisation.

M&A deals are much more likely to complete if they create domestic market leaders. Becoming a bigger bank strengthens ties to the government through business flow, and shareholders are also often attracted by stronger resilience of the new entity to credit or liquidity risk. Saudi British Bank and Alawwal Bank are discussing a potential merger that would create the third-largest bank in Saudi Arabia. Masraf Al Rayan, International Bank of Qatar and Barwa Bank are in the due diligence phase of a planned three-way merger that would create the largest Islamic bank in Qatar. National Bank of Abu Dhabi and First Gulf Bank in the UAE recently merged to create the largest bank in the UAE.

M&A deals are also much more likely if they allow shareholders to realise value on the day of the merger. The Saudi deal would potentially allow RBS to divest from its stake in Alawwal if Saudi British Bank were to buy out RBS, or at least make it easier for RBS to do so, with a smaller stake in a larger entity. RBS’s stake in Alawwal is reported to have been for sale for a number of years. The Qatari deal would probably result in short-term gains for some large individual shareholders. In many cases common shareholdings between banks also makes a merger more likely, such as in the Saudi deal.

When assessing the ratings impact of bank M&A, we consider the systemic importance of the merged entity and the impact this may have on sovereign support for that entity. For the Viability Rating we consider the new combined franchise and business model, risk appetite, management and strategy and the new combined capital position.


Redmond Ramsdale is Senior Director of Financial Institutions at Fitch Ratings Limited.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.
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