Potential FGB-NBAD deal may trigger more bank mergers

A potential merger between Abu Dhabi-listed First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) would likely trigger more consolidation and mergers within the UAE banking sector, industry analysts told Argaam.

The lender would be created with a market share amounting to 25 percent of loans and deposits in the country.

The merged bank would become the Middle East’s largest lender after Qatar National Bank (QNB), with an estimated market capitalization of AED 95 billion ($26 billion).

An FGB-NBAD merger is expected put a lot of competitive pressure on other banks in the UAE, according to Sebastien Henin, head of asset management at Abu Dhabi-based investment firm The National Investor.

“It might trigger some mergers between second and third-tier banks. It’s a crowded sector with 50 banks and credit penetration is 100 percent of GDP,” Henin said.

“At least in the quarters ahead, CEOs will start thinking about it as a possibility.”

In a recent note, Dubai-based investment firm Arqaam Capital highlighted a number of possible scenarios that could arise in the sector following the merger.

“ADCB could team up with Union National Bank (both controlled by ADIC), but the fit is less obvious to us,” Arqaam Capital suggested, noting that “UNB does offer a very attractive entry point for any acquirer.”

The note also outlined benefits associated with a hypothetical merger between Emirates NBD and UNB, as both are partly owned by Dubai’s government, while ENBD would offer a strong deposit franchise, an area where UNB is lacking.

Lower oil prices, tight liquidity, and slowing lending growth were also identified by analysts as factors that would lead to more merger and acquisition activity, as these trends are likely to continue in the short term.

“If this merger goes through, it will make it more challenging for the smaller banks to compete and this could pressure them to merge,” Shabbir Malik, banking analyst at EFG-Hermes said, adding that the timing was “appropriate” for further consolidation in the sector.

Malik described the potential merger as “a good fit” as the balance sheets and sector focus of both banks are compatible.

However, he said a deal is possible, but not certain.

Following a confirmation on the merger talks from FGB and NBAD, Abu Dhabi’s benchmark index surged by nearly 5 percent on Sunday, before falling the next session due to profit-taking.

Henin said the drop was a signal that investors may now be realizing that the benefits may be more long-term as these kinds of deals can take years to materialize.

In the meantime, he says a number of key questions still need to be answered.

“So, far we don’t know the details, if it will actually be a merger. We don’t know if one will acquire the second, or if the deal will be done in cash or shares,” Henin added.

Write to Joumana Saad at joumana.saad@argaamplus.com