Abu Dhabi banking shares climbed on Sunday after the boards of directors of First Gulf Bank and National Bank of Abu Dhabi approved a proposed merger of the banks, aiming to complete it in the first quarter of 2017.
Egypt's index edged up following comments by central bank governor about possible further currency devaluation.
Shares in NBAD jumped 4 per cent to Dh10.05 while FGB gained 2 per cent to Dh12.85. They were the market's two most heavily traded stocks.
The merger would be completed via a share swap which would result in shareholders of FGB receiving 1.254 new NBAD shares for every one FGB share. That ratio appears to favour NBAD holders, but several analysts said investors' general optimism towards the merged entity meant selling of FGB shares might remain minor.
"The initial reaction was a cheer because markets like the fact the merger is happening and it's a monumental size," said one regional banking equity analyst.
In the long run the efficiencies that will be achieved through cost-cutting and reduced competition will be positive not only for the lenders involved but for the sector as a whole, the analyst added.
Jaap Meijer, head of research at Dubai's Arqaam Capital said synergies should be very "substantial" from a cost reduction, product suite expansions and revenue sharing perspective, making the deal attractive for shareholders of both lenders.
Analysts at Arqaam Capital expect the deal to contribute positively to the earning per share of both banks, with FGB potentially seeing a 15.9 per cent rise and NBAD an 11.1 per cent increase.
Arqaam also said the swap ratio of 1.254 for 1 still slightly undervalued NBAD and overvalued FGB in the deal and it had reduced its target price for NBAD to Dh12.50 from Dh13 but increased it for FGB to Dh15.64 from Dh15.
"There are practical challenges which can only be addressed with a combination of flexible planning and relentless execution. Even then, the benefits can appear later than hoped for," said David Tusa, managing director at consultant firm Alvarez & Marsal, adding that often the human capital side gets much less attention than it deserves, and in these cases, "disappointment quickly sets in".
The deal could spur mergers of other banks including Union National Bank and Abu Dhabi Commercial Bank. Shares in UNB surged 5.9 per cent and ADCB's jumped 3.8 per cent.
The main index advanced 1.2 per cent.
In Dubai, the benchmark was up 0.2 per cent with most activity concentrated in second- and third-tier stocks. Islamic insurer Dar Al Takaful jumped 15 per cent, it daily limit.
In an interview with three local papers over the weekend Egypt's central bank governor, Tarek Amer, said there was "no defined target for the Egyptian pound/USD exchange rate" and strongly alluded to the prospect of further devaluation in the coming future - without setting absolute deadlines - adding that maintaining a fixed exchange rate against the dollar over the last five years was a "mistake that cost the state billions of dollars" and said he is willing to take the necessary measures to correct the currency shortfalls.
Investors reacted positively, with tourist and export related stocks outperforming Cairo's main index which was up 0.6 per cent. Arabia Cotton Ginning, a textile exporter, rose 2.9 per cent and Egyptian Resort jumped 4.4 per cent.
In Doha, the index gained 0.4 per cent, lifted by blue chips. Qatar National Bank, currently the largest listed lender in the Gulf region, added 1.4 per cent.
Saudi Arabia's market is closed throughout this week for Eid Al Fitr holidays.
DUBAI: The index lost 0.8 per cent to 3,337 points
ABU DHABI: The index added 1.2 per cent to 4,549 points.
EGYPT: The index gained 0.6 per cent to 6,982 points.
QATAR: The index edged up 0.4 per cent to 9,924 points.
KUWAIT: The index added 0.1 per cent to 5,369 points.
OMAN: The index added 0.6 per cent to 5,812 points.
BAHRAIN: The index advanced 1.1 per cent to 1,131 points.