ADCB, UNB and Al Hilal Bank to combine to create a powerful UAE banking group

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The UAE banking sector is set to have a powerful new banking group following the decision of Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) to merge and together to acquire Al Hilal Bank.

The transaction, which has been recommended unanimously to shareholders by the boards of ADCB and UNB, is subject to regulatory and shareholder approvals to be sought in the coming weeks.

The new banking group will carry the ADCB identity and will continue to benefit from strong institutional backing, through the Government of Abu Dhabi’s majority ownership. Al Hilal Bank will retain its existing name and brand and operate as a separate Islamic banking entity within the group.

ADCB will reinforce its position as the third largest financial institution in the UAE and will become the fifth largest in the Gulf Cooperation Council (GCC) region, with assets of AED 420 billion (USD 114 billion). It is expected to have around one million customers, with a significant share of the UAE market as follows (as at 30th September 2018) - 15 percent of total assets, 21 percent of retail loans, 16 percent of deposits.

The transaction will create a robust platform to grow the bank’s consumer and wholesale businesses in both conventional and Islamic banking. The bank’s strategic objective will be to increase market share by prioritising excellence in customer service and continually innovating its product and service offering, particularly through digital channels.

Greater scale will permit larger scope for financing to support the UAE’s economic agenda for diversification and growth, and more investment in the bank’s people, technology and infrastructure.

Eissa Mohamed Al Suwaidi is the Chairman designate of the new banking group, and Mohamed Bin Dhaen Al Hamli is the Vice Chairman designate. Ala’a Eraiqat is the Group Chief Executive Officer designate of the new banking group. The new board and management of the combined bank will assume their new roles when the transaction becomes effective.

Commenting on the announcement, Eissa Al Suwaidi, said, "This is a very exciting transaction that will create a larger, preeminent and resilient banking group. It is a landmark deal for the UAE that will contribute significantly to our national ambitions. A robust and innovative financial sector is crucial to the long-term prosperity of the UAE, as the country forges its transition to a diversified economy, connected to global markets by business and personal networks, trade and investments."

"The enlarged ADCB will have the scale and expertise to play a central role in the next stage of the UAE’s economic development," he continued, adding that by building on past successes to produce an even stronger, performance-driven and customer-centric institution, the combined bank will continue to set high standards for the UAE banking sector and contribute to Abu Dhabi’s development into a global financial centre.

"We remain committed to contributing to the development of the UAE banking sector, and I thank President His Highness Sheikh Khalifa bin Zayed Al Nahyan, His Highness Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, H.H. Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, and the UAE Central Bank for their continued support," Al Suwaidi affirmed.

The proposed transaction between ADCB and UNB will be executed through a statutory merger.

ADCB will issue 0.5966 ADCB shares for every UNB share, corresponding to a total of 1,641,546,697 new shares issued to UNB shareholders. The exchange ratio implies a premium to UNB shareholders of 0.6 percent versus the closing price of the previous trading day (28th January 2019) and 13.7 percent versus the pre-leak share price .

On the effective date of the merger, UNB shares will be delisted from the Abu Dhabi Securities Exchange. The combined bank will retain ADCB’s legal registrations.

Al Hilal Bank will be acquired by the combined ADCB/UNB entity, for a consideration of approximately AED1 billion, by issuing a mandatory convertible note for up to 117,647,058 post-merger ADCB shares to ADIC after the completion of the statutory merger.

The three banks will continue to operate independently until the combination becomes effective, which is expected within the first half of 2019. The combination is subject to approvals by shareholders and relevant regulators, including the UAE Central Bank. The transaction requires the approval of at least 75 percent by value of the shares represented at quorate general assembly meetings of each of ADCB and UNB.

Following completion of the merger of ADCB and UNB and the acquisition of Al Hilal Bank, the Government of Abu Dhabi, through the Abu Dhabi Investment Council, will own 60.2 percent of the combined bank. Other ADCB shareholders will own 28.0 percent, and other UNB shareholders will own 11.8 percent of the combined bank.

Ala’a Eraiqat said, "This transaction is a confident and transformational move that creates a new, robust and agile financial institution, built on a strong track record in conventional and Islamic banking."

With a wide and balanced customer base, the ADCB Group will focus its customer-centric growth strategy on its home market of the UAE, with a selective international presence, Eraiqat explained. "The bank will take advantage of scale and efficiency to invest further in developing its people, products, services and channels, with the objective of gaining greater market share. Furthermore, we will anchor our operations in robust governance, compliance and risk management, to ensure that the bank continues to act as a force for stability and strength in the financial system."

"The new bank is well-positioned to provide support for the UAE’s economic vision, and actively participate in the country’s growth and diversification," he continued, adding, "We look forward to creating a bank that will thrive in the region’s fast changing economic environment, while creating sustainable value for customers, employees, investors and communities."

The proposed combination creates a major banking institution, which will play a central role in the UAE economic landscape, with a strong and optimised balance sheet that is well positioned to face global macro-economic challenges.

Increased productivity and economies of scale will contribute to greater profitability and allow the bank to be highly competitive in its offerings to corporate and individual customers, in both conventional and Islamic banking.

It will increase scope for customer financing and generate the capacity to invest efficiently in key drivers of future growth, including compliance systems, digital transformation, cybersecurity and next-generation branches.

The three banks have grown in the last decade to achieve a significant aggregate customer and asset base. The transaction will create significant scope for achieving cost efficiencies in the coming years. The combination is expected to deliver cost synergies of approximately AED615 million (US$167 million) annually on a run rate basis, which equates to around 13 percent of the three banks’ combined cost base, above the global benchmark of between eight percent to 10 percentfor similar domestic transactions . These benefits are expected to be realised over two to three years.

The transaction has high potential for creation of shareholder value. It is expected to produce an uplift in earnings per share for the shareholders of the three banks in a steady state, with the combined bank expected to deliver double-digit returns on equity.

The combined bank will benefit from a strong balance sheet, solid financial metrics, and favourable access to capital markets. Its capital position will comfortably exceed Basel III regulatory requirements.

The combined bank’s funding profile will be diverse, with pro forma customer deposits accounting for 75 percent of total funding, including a strong low-cost CASA (current account savings account) base of AED96 billion, and wholesale funding making up 18 percent of total funding as of 30th September 2018. The bank will also have a healthy pro forma net loan-to-deposit ratio of 96.5 percent as of 30 September 2018.

The bank’s profitability metrics will be strong, with a pro forma cost-to-income ratio of 36.0 percent, with significant potential for improvement thanks to substantial cost saving opportunities and expected double-digit returns on average equity. The pro forma net interest margin of the combined bank is three percent.

The combined bank will have a well-diversified business and customer portfolio. Corporate gross loans will represent 75 percent of the total loan book, while consumer banking loans will account for 25 percent as of 30th September 2018.

The combined bank will embrace new opportunities created by the diversifying UAE economy, gaining market share by providing an excellent customer experience, while maintaining a selective international presence.
As the second largest retail lender in the UAE, the combined bank’s consumer business will provide an extended suite of market-leading products and services, backed by an approach that emphasises simplicity, convenience and high-quality service through digital channels and an extensive branch network.

The new banking group will operate the third largest Islamic banking franchise in the UAE, with a 13 percent market share. Islamic banking customers will benefit from a distinctive offering with a wide range of Shari’ah-compliant products and services.

A stronger and expanded balance sheet will also provide greater scope for financing large and growing corporate clients. The consolidation of the corporate and SME client base of the three banks will open up opportunities for cross-selling and for broadening relationships across sophisticated offerings, from structured finance to transaction banking and treasury services. The combined bank will benefit from a state-of-the-art cash management platform, which will reinforce its capacity to attract CASA deposits.

Robust governance will be central to the creation of sustainable value for all stakeholders, and the bank will be driven by a disciplined approach to pricing risk and to managing exposure and concentration. The leadership of the bank is committed to stringent compliance with best international practices in the banking industry.

The combined bank will offer a platform for growth of exceptional talent, providing exciting opportunities within a high-performance environment and embedding the culture of putting customers first.

The transaction provides scope for investing further in capability-building programmes and development of the highly diverse employee base. The bank’s aim is to contribute to the UAE’s role as a centre of excellence in financial services by actively encouraging UAE nationals to pursue careers in the sector and facilitating the training and professional development needed for success.

The merger of ADCB and UNB is intended to be effected by way of a merger pursuant to the applicable provisions of UAE Federal Law No. 2 of 2015 concerning Commercial Companies (the "Companies Law"). Subject to the satisfaction of the conditions to the merger, upon the effective date of the merger, the assets and liabilities of UNB will be assumed by ADCB in consideration for the issue of new ADCB shares to UNB shareholders. Upon the merger becoming effective, shareholders of UNB will become shareholders in ADCB, the UNB shares will be delisted from the Abu Dhabi Securities Exchange.

ADCB will issue 0.5966 ADCB shares for every UNB share, corresponding to a total of 1,641,546,697 new shares issued to UNB shareholders. The exchange ratio implies a premium to UNB shareholders of 0.6% versus the closing price on the previous trading day (28 January 2019) and 13.7 percent versus the pre-leak share price .

Al Hilal Bank will be acquired by the combined ADCB/UNB entity for a consideration of approximately AED 1 billion, by issuing a mandatory convertible note for up to 117,647,058 post-merger ADCB shares to ADIC after the completion of the statutory merger.

Following completion of the merger of ADCB and UNB and the acquisition of Al Hilal Bank, the Government of Abu Dhabi, through the Abu Dhabi Investment Council, will own 60.2 percent of the combined bank. Other ADCB shareholders will own 28.0 percent, and other UNB shareholders will own 11.8 percent of the combined bank.

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