Following our announcement yesterday that merger talks were being held by Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB to discuss an update on a potential merger with Al Hilal, an Islamic bank, ADCB announced today that they agreed to merge with UNB and Al Hilal Bank, according to a statement.
ADCB offered 0.5966 share for every UNB share. afterwards, the combined entity will buy privately-held Al Hilal Bank for about AED1 billion ($272 million) by issuing a mandatory convertible note.
The deal is expected to close in the H1, 2019.
A recent Moody’s report said “Slow growth and subdued credit demand in the region is one of the biggest drivers of consolidation… has intensified competition for depositors and borrowers, dampening profits at GCC banks.”
National Bank of Abu Dhabi and First Gulf Bank last year merged to create First Abu Dhabi Bank (FAB) a lender with $175bn in assets.
3-way merger talks
Talks between ADCB, UNB and Al Hilal Bank were at an advanced stage, according to Bloomberg, despite reports showing that anywhere between 500 to 1000 jobs could be lost as a result.
The merger would create an entity with around $113bn in assets.
UAE’s 10 million population, served by nearly 50 banks (22 national and 27 foreign), makes it ripe for mergers.
UAE Central Bank Governor Mubarak Rashed Al Mansoori said in a recent event that more consolidation is likely in the UAE’s banking sector, in the near future, despite it being liquid and strong with credit growth to private sector increasing 6.5% during the first 9 months of2018 while that of Islamic banking was growing at 9%.
According to Reuters, smaller banks in the UAE are facing regulatory pressure to merge after the property downturn.
Smaller banks in the UAE, which are mostly family-owned, have lost market share to the top four lenders, which now control around 65% of banking sector loans, according to Fitch.
It said mergers in the sector to accelerate given a slowing economy, a slide in home prices, and tougher competition.
Said Redmond Ramsdale, senior director, financial institutions at Fitch Ratings. “Real estate and contracting sectors are a large sectorial exposure across all UAE banks. This is putting pressure on asset quality metrics for all banks.”
Talk merger and see a surge
Banks such as ADCB and UNB have seen their stock prices surge multi-folds ahead of today’s merger agreement, Gulf News reports.
ADCB has gained 24%, its highest level in 52 weeks of Dh9.15 from a low of Dh7.41 seen on October 23, while UNB shares have gained 23% since December 2018.
FAB has gained 46% in the last 13 months since the merger news was announced.
Do Islamic banks need to merge?
It makes sense for ADCB to seek a merger with an Islamic bank.
Said Khalid Howladar, managing director of risk, rating and Islamic finance advisory firm Acreditus: “ADCB could probably use a boost to its Islamic window given the positive retail dynamics of the sector,” as reported by Salaamgateway, an Islamic industry site.
UAE has seven standalone Islamic banks, three of which are headquartered in Dubai: Dubai Islamic Bank (DIB), Emirates Islamic, and Noor Bank. The others are Abu Dhabi Islamic Bank (ADIB), Sharjah Islamic Bank, Al Hilal Bank, and Ajman Bank.
SalaamGateway reports that standalone Islamic banks and Shariah-compliant windows of conventional banks in the UAE have been steadily growing their market share, from 17.3% of total banking assets in 2013 to 18.9% in 2015 to 20.6% in June 2018, quoting Central Bank data.
“They have been scoring 1.7%, 1.5% and 1.7% return on assets (ROA) respectively from 2015 to 2017, in comparison to their traditional banking counterparts, growing at 1.6%, 1.4%, and 1.5% during the same three-year period,” said the site.
Asad Ahmed, managing director at professional services firm Alvarez & Marsal, told Salaamgateway that UAE’s bigger standalone Islamic banks will continue to expand, and they’ll do so organically or inorganically.
“A number of banks in the region have adopted various expansion strategies. DIB, for example, has – in addition to rapid growth in UAE – set up in Kenya with a view to participating in the growing Islamic banking market in East Africa, and Abu Dhabi Islamic Bank has a sizeable franchise in Egypt,” he said.
DIB also has banking operations in Pakistan and Indonesia and holds a stake in Bank of Khartoum. ADIB has an international presence in Iraq, Saudi Arabia, and the United Kingdom.