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18 July 2024

Banks seek non-organic GCC growth

By Nitin Nambiar



Commercial Bank of Qatar (CBQ) Tuesday raised its stake in Sharjah-based United Arab Bank (UAB) to 34.7 per cent as analysts said the regional banking sector will see increased mergers and acquisitions activity as a means of entering restricted environments.


CBQ’s latest stake acquisition gives it enhanced exposure to the second-largest Arab economy – the UAE – and greater control over the management board of the Sharjah bank. CBQ, Qatar’s second-biggest lender by market value, owns 246.91 million shares in UAB after a series of purchases, the bank said in a statement on the Doha bourse website, without saying how much it paid for the shares.


At UAB’s closing share price of Dh7.40 on December 13, the day the stock was last traded on the Abu Dhabi Securities Market, CBQ’s holding in the bank is valued at just under Dh1.83 billion.


CBQ Chief Executive Andrew Stevens and Director Omar Al Fardan will sit on UAB’s board, the bank said.


Gulf banks, buoyed by the economic windfall of record oil prices, are looking outside their home markets. Tough competition and legal restrictions are, however, encouraging them to expand through acquisitions instead of branch expansion.


“In April this year, the UAE Central Bank suggested no new bank licences would be issued for the foreseeable future with a view to strengthening the existing banking system. Consequently, foreign banks have realised cross-border applications for new banking licences are going to be tough.


“So, mergers and acquisition of stakes in domestic banks seems a sensible alternative,” said Raj Madha, GCC banking analyst at investment bank EFG-Hermes.


CBQ bought 34 per cent of National Bank of Oman in 2005. The Qatari lender said earlier this month that it owns 14.7 per cent of UAB and would acquire as much as 40 per cent of the bank.


Consolidation seems to be the theme in the region’s banking sector. In a report released by EFG-Hermes last week, the Cairo-based bank said consolidation, mergers and acquisitions had become increasingly important in the face of falling barriers to international competition driven by free trade agreements and cross-border licencing agreements.


One of this year’s highlights was the merger of Emirates Bank International with National Bank of Dubai to form Emirates NBD. The decision was clearly driven by a desire to strengthen the domestic sector by seeking consolidation.


The merger created the biggest bank in the Middle East by assets and the biggest in the UAE on most other measures. “With a starting market capitalisation in excess of Dh40 billion, it is a bank with sufficient scale to have strong operations in every banking segment,” EFG-Hermes said in a report.


While this was by far the most important M&A event in the sector, it was not the only one. Emirates International Investment Company acquired a controlling stake in Abu Dhabi Islamic Bank (ADIB) via a convertible bond. Later, ADIB bought controlling stake in Egypt’s National Bank for Development, which had a large portfolio of non-performing loans. Dubai Financial Group bought a significant stake in the Greek Marfin Financial Group, which has several banking assets around the globe. Marfin bought controlling stakes in three banks in the second half of this year.


Moody’s Investor Services said in a banking review released last week that overseas expansion offers opportunities for both geographic and revenue diversification as competition in the local market intensifies. “Further consolidation may lead to stronger and more diversified financial institutions,” the report said.


While the UAE Central Bank has put on ice the issuance of any new licences, it did permit two new banks – Al Hilal Bank and Al Noor Bank – to open in the UAE, taking the total number of banks at the end of the year to 49. It also increased the number of UAE-based Islamic banks to seven.



Welcome change


Entry barriers for foreign banks, including taxation and a restriction on the number of branches, have resulted in more banks looking for the M&A route into the region, an EFG-Hermes analyst told Emirates Business.


“Foreign banks are restricted to eight branches and are taxed as opposed to domestic banks. These are likely being negotiated in the various free trade agreements and the country seems to be moving towards opening up its shores for foreign players, and particularly those from within the Gulf,” said Raj Madha, GCC banking analyst at EFG.


“Within the GCC, banking licences are issued on a reciprocal basis – that is, if one GCC state issued a licence for an entity from another GCC country, then it would also expect one of its banks to be issued with a banking licence in the other GCC country.”


In November, Central Bank Governor Sultan Nasser Al Suwaidi said the regulator is considering the possibility of issuing licences to three Gulf banks. The total assets of national and foreign banks in the UAE crossed Dh1trn in 2007.