Fitch: Emirates NBD merger positive for the UAE banking sector

Emirates NBD will benefit from a larger capital base and improved access to the international capital markets, while economies of scale should support its profitability.

'The merger will also no doubt inspire other banks in the UAE and elsewhere in the region to seek mergers or acquisitions to consolidate their positions in an increasingly competitive environment,'

says Philip Smith, Senior Director in Fitch's Financial Institutions group.

Fitch believes that the merger is at present credit rating neutral, based on the information currently available. EBI's Long-term Issuer Default Rating ('IDR') of 'AA-' (AA minus) with Stable Outlook reflects the extremely high probability of support from the UAE authorities. EBI's other ratings are Short-term IDR 'F1+', Individual 'B/C' and Support '1'. It has a Support Rating Floor of 'AA-' (AA minus). NBD has a Support rating of '1'. The agency will closely monitor developments and make a further rating announcement in due course.

The proposed merger combines the two largest banks in the Emirate of Dubai by total assets. Based on end-2006 financial statements, the combined bank would have total assets of AED165.2bn and total equity of AED14.9bn, with combined market shares of around 19.2% by total assets, 21.7% by total loans and 18.4% by total deposits within the UAE. While both EBI and NBD have primarily a wholesale banking focus, the combined entity will have a leading retail banking franchise with almost 100 branches (including Islamic banking), as well as strong investment banking and private banking franchises. However, initially, it is expected that the two banks will continue to operate as separate wholly-owned subsidiaries, while the integration process is underway.

Following the initial announcement in early March 2007, the Boards of Directors of EBI and NBD yesterday announced the terms of the proposed merger. A new company, Emirates NBD, licensed by the UAE Central Bank, will acquire the shares of the two banks, in exchange for shares in the new company. The Government of Dubai has confirmed its intention to accept the offer in respect of its own shares in both banks, which will result in a majority stake of around 56%. The offer is subject to approval by the regulatory authorities and a majority of the shareholders.

EBI offers a range of financial services, including commercial, consumer and public sector finance, investment banking, insurance, Islamic banking, credit cards and property management through a network of 58 branches in the UAE and offices in London, Jersey, Mumbai, Riyadh, Tehran and Singapore. It was formed in 1986 from the government-arranged merger of three troubled wholesale banks; the franchise was extended in 1991 with the state-sponsored acquisition of a local retail bank. The group is 76.62%-owned by the Government of Dubai, with the remaining shares widely held by UAE investors.

NBD operates through a domestic network of 41 branches and internationally through branches in London, Jersey and Doha and a representative office in Tehran. The bank was established in 1963 and its main shareholders are the Government of Dubai with 14.25% and leading local merchant families.