Inside Oman's banking merger

Suhail Bahwan is laughing all the way to the bank. For the chairman of the ailing National Bank of Oman, the recent merger with rival BankMuscat - Oman's largest financial institution - represents a bold move to strengthen his group's presence in the country's banking sector.

All the more so since the group - which has an extensive presence in nearly every facet of the Omani economy - did not have even a marginal role in banking at the start of the year. But Bahwan's rapid emergence in Oman's banking industry may come at a steep price - though not necessarily for him.

The promoter shareholders in NBO - some of the other prominent business groups in Oman - are not pleased with Bahwan's recent rise to prominence, although the cash infusion that came along with it was something they could not do without. Now, with the BankMuscat merger all but a done deal, they are the ones who may see a sharp decline in their influence within the banking sector.

Cash infusions

First a little NBO history. Bahwan came in with a $138.4 million capital inflow to acquire a 35 percent stake in NBO, and thus emerge as the single largest shareholder in the entity. Then, almost as a natural progression, came the chairmanship of the bank.

However, even with the cash infusion and gravitas provided by the Suhail Bahwan Group, NBO's financial problems showed no signs of abating. The financials for 2003 were poor, especially in the context of the continued gains recorded at BankMuscat.

While there has been some measure of improvement in the 2004 performance, NBO's accumulated losses were sinking the bank deeper into a hole. There was intense speculation that provisions for this year would be higher than had been indicated.

Meanwhile, CEO John Finigan left just after second-quarter results were announced. In came a retired technocrat from India, B. Vasanthan, with a brief to stop the decline. And then came the coup de gr‰ce - at least for NBO.

In a deal expected to be one of the biggest ever to date in the Middle East, BankMuscat and NBO confirmed that a merger was in the works, which would create a banking powerhouse with truly regional reach.

The Central Bank of Oman and the country's Capital Markets Authority have given their blessing to the union, and other regulatory processes should to sail through just as swiftly.

It is believed that the Omani government was actively working behind the scenes to get the merger process going. According to sources, the government was not optimistic that NBO would get back on its feet soon. And that, they felt, was unacceptable.

NBO had made provisions for around 70 million Omani rials ($182 million) in its 2003 results, and 2004 looked unlikely to provide any respite. But an NBO that merges with BankMuscat would be an altogether different story.

Post-merger bank

The merged entity will control over 60 percent of Oman's banking assets, putting it in a much stronger position to take on new competitors when Oman opens up its banking sector in 2005. For BankMuscat, the move further consolidates its hold on the domestic market.

After the merger, the chances of it participating more actively in the big-ticket syndication deals within Oman and elsewhere in the Gulf are much stronger. Recent months have seen BankMuscat tap new opportunities as its seeks to grow beyond Oman.

This was why it bought a stake in India's Centurion Bank. Now, the NBO buyout - only the charitable call it a 'merger' - is the perfect cap to what has been a good run. Heavy losses.

'When the rest of the Gulf banks were putting in strategies to prime themselves for future challenges, NBO, sad to say, was wallowing in the past,' said a senior official with the Suhail Bahwan Group who was closely involved with the pre-merger talks.

'So much time was spent in trying to get a grip on accumulated losses. The group and the new management that was being put in place could have turned around the entity, but that would have taken time. We strongly believe that the merger was the best way forward - not just for NBO but for BankMuscat and Oman's banking sector as a whole.'

But some say that the Suhail Bahwan Group is the ultimate winner. The merger is going to be consolidated through an elaborate share-swap, which would see the group emerge with a stake of just over 10 percent in the new entity.

That would leave it with the status of being the second-biggest private shareholder after the Sheikh Mukthasil Group, though the difference will be narrow. The government entity - in the form of Dewan's Court - will be the single biggest shareholder with a 15.2 percent stake.

But there will be plenty of floating stock available in the new entity after January 1, 2005, when the merger is formalized. Some estimates suggest the floating stock - those with small investors - could represent 35 percent of the total.

That could prove attractive enough for Suhail Bahwan to raise his stake by buying additional shares. Consider these numbers. When Suhail Bahwan bought into NBO, the share price was 2.2 Omani rials. The group is estimated to hold 24.22 million shares in NBO.

The coming share swap with BankMuscat places the NBO price at 2.6-2.8 rials. That would translate into a notional profit of well over $30 million if they were to sell - a hefty return for a mere six-month investment period.

But the smart money suggests that Suhail Bahwan Group will hold onto - and build on - the stake after the merger. 'It is a win-win for Suhail Bahwan Group - they emerge a significant shareholder in one of the strongest financial institutions in the Gulf. And they do so by reaping a windfall from the merger, either by holding onto the stake or selling it off,' said a banking analyst based in Oman.

Some of the other key shareholders in NBO concur, but put a different spin on it. 'The entry of Suhail Bahwan Group has led to the demise of a once great institution,' said one of the bank's shareholders.

'If anyone believes that all shareholders had participated wholeheartedly in the merger proposals, they are being foolish. NBO was in a difficult position, but it was certainly far from being a terminal case. It all boils down to who reaps the benefits. This is a sad chapter in Oman's banking history.'