UAE banking sector set for further consolidation: MUFG

Global banking sector changes are making consolidation in the UAE both "likely and necessary," MUFG Bank said in a recent report.

"Financial institutions are leveraging advancements in artificial intelligence with increasing commitment to digitizing services with larger banks being better positioned to adapt to the rapidly changing operating environment," it added.

The report comes following the plausible merger talks announced between Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al Hilal Bank, which would establish a bank with combined assets of nearly $115 billion and creating the fifth-largest lender in the MENA region.

All three banks have one mutual majority shareholder – Abu Dhabi Investment Council (ADIC), which currently owns 62.52 percent of ADCB, 50.01 percent of UNB and 100  percent Al Hilal Bank, which is not publicly listed, said MUFG.

"We view that a three-way merger could release long-term value through economies of scale, synergies and overall restructuring for ADIC. Therefore, such a proposition would make sound business rationale for ADIC as it would merely own a more profitable combined banking group after cost restructuring has been implemented, which will in-turn lead to surplus capital release, reduce the cost of funding and enhance asset quality," the report added.

"This three-way merger scenario is multi-faceted, but we view that a share swap would be the most probable mechanism to fund a potential transaction against a pure cash acquisition."

Meanwhile,  there are 46 commercial banks operating in the emirate, with representative offices for a further nine banks excluding banks operating in the offshore vicinity of the Dubai International Financial Centre (DIFC), the report said, citing UAE Central Bank data.

These lenders cater for a population of only 10.5 million – which compares with 12 domestic banks and 15 foreign bank branches for nearly 33 million individuals in Saudi Arabia.

Separately, the UAE comprises a highly fragmented market, with few large banks (FAB, Emirates NBD and ADCB comprising 53 percent of the total UAE banking sector) and many smaller lenders, making it "ripe for further consolidation."

"We view that merging banks realizes healthy synergies, and in-turn potentially lowering the cost of funding through economies of scale and return on equities (ROEs). Moreover, we forecast better asset pricing discipline as banks merge with lower concentration risks in loan portfolios," MUFG concluded.