Abu Dhabi consolidates banking sector

In January, three Abu Dhabi banks announced plans to merge, creating UAE’s third largest financial institution and the fifth largest in the GCC in terms of assets.
Sunday 14/04/2019
A general view of Abu Dhabi. (Reuters)
Creating value. A general view of Abu Dhabi. (Reuters)

WASHINGTON - As part of a trend to streamline essential financial sectors, Abu Dhabi is working to consolidate the United Arab Emirates’ crowded banking industry through a series of mergers and acquisitions.

One blockbuster banking merger and acquisition (M&A) transaction is close to completion with rumours of an even bigger agreement that could create the region’s largest lender. A report about that possible deal prompted the two banks in question to go to great lengths to shoot down speculation of a suspected tie-up.

In January, three Abu Dhabi banks announced plans to merge, creating UAE’s third largest financial institution and the fifth largest in the Gulf Cooperation Council (GCC) in terms of assets. The transactions involve Abu Dhabi Commercial Bank (ADCB) merging with Union National Bank and that combined entity buying Al Hilal Bank.

The new organisation would operate under the ADCB brand with assets of approximately $114 billion. Al Hilal Bank would serve as a separate Islamic banking entity in the group. The Abu Dhabi government would have a 60.2% holding in the enhanced ADCB. The three-way merger is expected to take effect in May.

A report April 3 suggested that, upon completion of the ADCB M&A, two other leading Abu Dhabi financial institutions would begin discussions about a potential merger. A combination of First Abu Dhabi Bank (FAB) and Abu Dhabi Islamic Bank (ADIB) would create a lender with $236.7 billion in assets, eclipsing Qatar National Bank’s assets of $235.9 billion, to emerge as the GCC’s largest bank.

FAB is the UAE’s largest bank with assets of $203 billion as of December 2018 and it is the second largest bank in the GCC behind Qatar National Bank. FAB is itself the result of a 2017 merger between National Bank of Abu Dhabi and First Gulf Bank. FAB’s largest shareholder is the UAE government, which holds a 37.1% stake. ADIB is the UAE’s second-largest Islamic lender.

A report of a potential FAB-ADIB merger prompted both financial institutions to issue strong denials in separate filings to the Abu Dhabi Securities Exchange (ADX). While noting in its ADX filing that the bank does “not comment on speculation,” FAB said it “strongly denies” the report “on the potential merger between FAB and ADIB.” The bank stated that FAB “has not entered discussions with ADIB to pursue any merger activity.”

ADIB, in its bourse filing, declared that reports of a potential merger between it and FAB “are not true and the bank is not looking for any mergers with any bank.” Such protestations have fallen on deaf ears in the investment community, with ADIB shares at their highest trading volumes on ADX in two years following the report.

The UAE’s financial industry is considered “over-banked,” boasting some 50 banks, including more than 20 domestic entities, to meet the needs of a population of 9.4 million. The Gulf federation’s banking sector has been hard hit in the last five years by lower oil prices that have affected government spending and resulted in decreased profit margins. Abu Dhabi’s push for consolidation of state banks through M&As is intended to promote competitiveness and cost efficiencies.

In a report earlier this year focused on GCC banking mergers, global credit rating agency Moody’s Investors Service pointed to a consolidation trend throughout the region’s banking sector, which the agency contended would be beneficial for Gulf financial institutions because, as overcapacity is eased, profitability is increased through synergies and greater pricing power.

Moody’s Vice-President and Senior Analyst Ashraf Madani wrote in the report that “slow growth and subdued credit demand in the region is one of the biggest drivers of consolidation.”

The report suggested that further GCC banking consolidations should be expected in the near term despite slow economic growth. the Moody’s assessment said: “There are encouraging signs as evident in the increase in potential M&A activity that shareholders are coming to realise that mergers can create value for them in the long run.”

In addition to tackling the domestic banking industry, the Abu Dhabi government has addressed combining its top sovereign wealth funds, which have served as strategic state investment arms. In January 2017, the Abu Dhabi government created a new sovereign wealth fund — the Mubadala Investment Company — with assets of approximately $125 billion by merging two existing investment funds, Mubadala Development Company and International Petroleum Investment Company.

This was followed by a second round of fund consolidation in March 2018, when it was announced that Abu Dhabi Investment Council would be absorbed into Mubadala Investment Company, creating a single investment fund with a combined portfolio valued at more than $200 billion. Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed al-Nahyan, lauded the merger, posting on Twitter: “An investment vehicle of such scale will enhance the country’s competitive position.”