Mega bank merger to shake up Abu Dhabi in 2008

A major bank merger is expected to shake up Abu Dhabi’s banking sector this year as large players look to consolidation to compete with the entrance of international monetary entities into the market.

Candidates for the mega merger may include the National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank (ADCB), the Union National Bank (UNB), and Abu Dhabi Islamic Bank (ADIB), although analysts say the inclusion of the last in the deal seems unlikely.

Ziad Dabbas, a financial consultant at NBAD, predicted this year will witness a large-scale merger in Abu Dhabi’s banking sector. “Abu Dhabi Government holds large stakes in NBAD, ADCB, and UNB. We do not know which banks will merge but such a merger will create a giant financial institution that can compete in the local market and expand its activities in international financial areas,” he said.

“Proposals are under consideration. The main ideas are a merger between NBAD and ADCB or NBAD and UNB, but the final decision should be taken by the Government of Abu Dhabi,” according to Dabbas.

He explained the banking sector in the UAE is striving for consolidation, leading financial services into the next phase of growth and development to compete with international banks entering the country and the Gulf Co-operation Coucil nations.

The merger of the National Bank of Dubai and Emirates Bank International, Dabbas noted, created a giant financial institution, which serves as an example for financial services to expand their business on the local as well as the international market.

“The UAE is witnessing economic growth where all economic sectors are projecting unprecedented activity, and they must deal with banks to secure funds and liquidity for their projects. Mergers will boost local banks’ ability to finance massive development projects in the country and the GCC region,” he said.

The flow of petrodollars into the UAE has also increased liquidity and government expenditure, both in capital investments and infrastructure projects. The banks stand to benefit from capital influx and the increase in government and private deposits.

A merger, Dabbas said, would increase local banks’ ability to diversify their financial products and appeal to individual customers. “This will support their profits and their competitiveness. Local banks, large ones, became more competitive in front of foreign banks working in the country. The merger will put local banks in a better position.”

NBAD, the largest bank in the UAE by assets, began planning for a major restructuring last year and appointed international consulting firm McKinsey & Company to advise it on the process. Banking experts have said they consider this restructuring plan as preparation to gear the bank for a merger.

As a leading bank in the UAE and an important asset for the emirate of Abu Dhabi, NBAD needs to be developed as a full-scale international bank, leaving no option but to get more bigger, said Dabbas.

The UAE’s banking industry has been in a flux as local banks, especially the major players, have committed themselves to adopting restructuring plans in a quest for survival. Looming international competition has encouraged the domestic sector to mature and consolidation of smaller banks is the natural next step to mount a challenge to international financial powerhouses.

Dabbas emphasised local banks are serious about mergers. Traditional banks are eager to remake themselves into modern companies that can offer customers comprehensive banking services, whether the customers are individuals or institutions.

Meanwhile, ADCB, the third-largest UAE lender by market value, said last July it is prepared for a merger proposal. The bank was not under pressure from the Abu Dhabi Government to tie-up with NBAD, but shares of both banks have been rallying on rumours they were planning a tie-up.

ADCB, analysts have noted, currently seems to be more interested in foreign acquisitions rather than the prospects of a merger.

Nevertheless, analysts have said the most likely scenario for a merger is between the NBAD and ADCB. If this takes place, the market capitalisation of the merged bank, based on Tuesday’s numbers, would exceed Dh60 billion.

Banking experts say the potential merger between the NBAD and ADCB will be a soft transition because the Abu Dhabi Government is the major shareholder in both banks. Abu Dhabi has a stake of 72.96 per cent in NBAD and 64.8 per cent in ADCB. It also has a stake of 50 per cent in UNB.

NBAD’s assets by the end of September 2007 had reached Dh117.5bn, while assets of ADCB by the end of September 2007 hit Dh100.4bn, according to the third-quarter financial results. So the estimated total assets of the merged bank would total to at least Dh218bn. Total deposits of the two banks would also reach Dh125bn, while total loans would amount to about Dh133bn.

NBAD has 72 local branches and 33 branches in Bahrain, Egypt, France, Oman, Kuwait, Sudan, the UK, Switzerland, and the US. The ADCB has 42 local branches as well as two branches in India.

The economic boom in the UAE has driven growth of the banking sector. The banking sector played an important role in financing many projects, especially in the trade and construction sectors. In 2006, the UAE banking sector became the largest in the GCC with total assets of $234 billion (Dh859.3bn) followed by Saudi with $229bn and Bahrain with $187bn. Also, in terms of penetration rates – measured by loans and deposits as percentages to GDP – the UAE has surpassed all GCC countries.

Hany Seif, investment analyst at Damac Securities, told Emirates Business: “Most GCC banks are small entities, which would not be able to survive in a global industry. The consolidation process should take place. Most GCC countries are opening their markets for global competition due to WTO rules.

“We have a positive outlook for UAE’s banking sector and its expected profitability. We believe the sector will witness a sound growth in profitability compared with figures achieved in 2007. The UAE’s robust economic performance will continue driving the growth in loans and deposits,” he said.

Seif said the main concerns that could hit the banking sector include a sharp decline in oil prices, stock market shocks, a severe correction in real estate mainly for banks with exposure to project finance and mortgage loans and a deterioration in the quality of assets.

“The UAE banking sector is fragmented, as 46 banks, national and foreign, are serving 4.5 million people, with a GDP of $164bn. Therefore, a consolidation phase may begin if the merger between Emirates Bank International and National Bank of Dubai proved to be an economic asset to the market,” he said.

Any merger of the UAE banks will have a positive impact on their stock prices. Saket Al Jendi, Managing Director of Electronic Stock for Shares and Bonds Company, said: “The merger will create strong entities. The operating costs of banking services will reduce and accordingly the profits will increase. This will in turn increase earnings of shareholders and boost the prices of the stock in the market.”

Jendi, who is also a banking expert, added a merger would increase assets and management efficiency.

“There are massive projects in the country and they need large funds. Some banks issued international bonds to secure required liquidity to finance these projects,” said Jendi.

He said a merger will gather liquidity in the banks and, accordingly, they will not need to issue bonds.