GulfMerger sees opportunities for consolidation and regionalization in the GCC consumer finance market

Key considerations in GulfMerger's assessment include the GCC-wide demographic and macroeconomic trends underlying the market's growth trajectory, and the number of smaller consumer finance companies that would make attractive merger or acquisition candidates.

As an example of the market's recent growth, the Kuwaiti consumer finance market has grown rapidly in recent years, with consumer loan portfolios growing from KD3.9 billion in 2005 to KD4.6 billion in 2006. According to GulfMerger, car financing has been a key contributor, accounting for KD340 million in new loans in 2006, and an estimated KD390 million in new loans in 2007.

Based on current demographic and macroeconomic trends, GulfMerger expects car financing in Kuwait to grow from an annual financing of 65 thousand cars in 2007 to over 90 thousand cars by 2012, resulting in KD670 million in new car financing loans in 2012. These forecasts are based on the combined effect of three factors that are expected to have similar implications for the growth of the broader consumer finance market across the GCC: increasing population growth, higher car ownership, and an increasing propensity by car buyers to finance their purchases. In the case of Kuwait, GulfMerger expects Kuwait's population to grow from 3.4 million to approximately 4.4 million inhabitants over the five year period ending 2012, car ownership to expand from 315 to 340 cars per 1000 inhabitants, and car financing to increase from 65% to approximately 70% of all new cars purchased in light of the greater availability of financing providers.

The research also reveals that the regional consumer finance market is relatively fragmented with a number of conventional and Islamic banks and consumer finance companies. Among these players, there are several smaller consumer finance companies that lack sufficient scale, brand awareness, access to low cost funding sources and distribution arrangements, and that are therefore at a particular disadvantage relative to their larger peers.

The research specifically points to at least four strategic mergers and acquisitions plays. The first is merger and acquisition activity among local, smaller consumer finance companies. Such activity would allow them to instantly increase market share and leverage their larger size towards achieving deeper penetration of key distribution channels, strengthening their brands, and lowering their cost of funds through financing alternatives that are typically available to larger consumer finance companies.

The second is the acquisition of smaller consumer finance companies by national banks. Such strategic moves would help these banks increase market share in one of the most profitable segments of the banking industry. Given their lower cost of funds, these banks would also be well-positioned to significantly enhance the profitability of newly acquired consumer finance companies in a very short time by refinancing existing borrowings.

The third is the acquisition of smaller consumer finance companies by regional banks looking to enter the GCC banking market. Considering the challenges and costs of acquiring large commercial banks in such markets, smaller acquisitions would present regional banks with an accelerated path towards entering new markets in the GCC, while focusing on the most profitable segments.

The fourth is the acquisition of smaller consumer finance companies by financial investors seeking to build leading regional consumer finance companies that can capitalize on favorable market developments across the GCC. Private equity houses would be the likely actors in this particular scenario, given their recent efforts to consolidate certain sectors such as education and distribution.

Muayyad Qubbaj, Director at GulfMerger, said: "The growth we are projecting in the car financing arena is based on robust demographic and macroeconomic trends that we expect will have similar implications for the growth of the broader consumer finance market across the GCC. Given the number of smaller consumer finance companies that currently operate in this space, we also expect the market to go through a wave of consolidation and regionalization in the near future, spearheaded by industry players and private equity houses with clear strategic and financial imperatives."