Mergers will improve efficiency for UAE banks: analysts

Speculations over new mergers among Abu Dhabi banks have been crushed for now, but analysts believe that Gulf lenders will benefit from consolidation in a sector struggling with a liquidity crunch.

“Liquidity crunch is largely because of the macro-economic factors…. But when banks come together, they can become more efficient in allocating that liquidity to the economic sector,” Prathit Harish, partner and financial services consulting leader at PwC-Middle East, told Argaam.

Harish said within the United Arab Emirates (UAE) he sees a potential for consolidation in the smaller institutions “because that is where efficiency gains can then be achieved.” 

But despite the benefits – that include reduced competition, improved coverage, greater synergy – the last merger that UAE saw was when Emirates Bank and National Bank of Dubai came together to form Emirates NBD in 2007.

“I think what is important is to see it from a shareholder’s perspective. Do the shareholders see value in the merged entity – is it accretive for the shareholders or do they perceive a merger as a dilutive,” Harish said.

With the return on equity (RoE) from some of the banks already in the higher range, there appears to be little push for the shareholders to seek further gains. A “perceived loss of control” could be the other factor holding the shareholders back, he added.

Chiradeep Ghosh, manager-research at Securities & Investment Company (SICO), agreed noting that a merger brings its own set of challenges such as culture integration, redundancies management and arriving at the correct strategy going forward.

“Mergers also usually lead to ownership dilution, hence only if shareholders of both entities perceive greater value post the merger, will they take the route,” Ghosh added.

Market reaction

A report of a possible merger between Abu Dhabi Commercial Bank and Union National Bank rocked the two banks’ shares on the Abu Dhabi bourse, with the stocks rallying until the lenders posted separate denials.

The shares have been volatile since as hope remains that the combination will come through after National Bank of Abu Dhabi and First Gulf Bank complete their merger process next year.

After ADCB and UNB denied any “knowledge” of merger plans, Jaap Meijer, managing director (equity research) at Arqaam Capital, said in a LinkedIn post that he still expects to “see an M&A deal within 12-18 months despite denial about upcoming merger.”

“UNB is an extremely attractive takeover target for ADCB,” he added.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com