Complex Made Simple

Which banks seek to survive the competitive UAE market?

With a slowdown in economic growth, tallied at 0.5% last year by Bloomberg, it seems that banks in the UAE are struggling to keep their head above water.

With the UAE’s population of 9 million served by about 50 banks, and amidst a weakened economy, three banks have decided to join forces.

As the popular saying goes: if you can’t beat them, join them.

The second major bank merger in two years

Publicly-listed Abu Dhabi Commercial Bank (ADCB) and rival United National Bank (UNB), as well as Islamic private bank Al Hilal Bank are in prelim talks for a planned merger.

Given a previous merger that occurred last year combining the First Gulf Bank and National Bank of Abu Dhabi, other banks were left in the dust.

The 2017 merger saw a new bank rise out of this fusion, resulting in a behemoth: the First Abu Dhabi Bank (FAB), which Bloomberg estimates holds total assets of $188 billion. This made it the second most valuable bank in the GCC.

The wealth of capital at its disposal made FAB a major force in the UAE banking sector, outshining its scattered competitors. Given the aforementioned slow economy, the smaller banks were at a severe disadvantage.

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Now, it seems that ADCB and the two other banks have decided to join forces so that they can consolidate their assets and efforts, in order to survive the challenging market.

“The UAE has been overbanked for a long time and consolidation has been happening in the banking and investments sector to create bigger entities to compete strongly regionally and globally,” said Tariq Qaqish, managing director, asset management at MenaCorp.

If the merger is successful, the unified company could be worth $113 billion in combined assets, according to Thomson Reuters data, making it the 5th most valuable bank in the region, and the country’s 3rd biggest lender.

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Challenges await, but so do great rewards

Merging three different companies, with different ideologies, operational procedures, and managers is not an easy task, and the three banks said that nothing is set in stone yet, as talks could break down.

“…Mergers could result in job losses the closure of branches, which might have spillover effects, impacting the real estate or healthcare sectors,” Qaqish explained.

However, should it work, the banks could stand to gain plenty. In fact, as soon as news of the potential merger broke, ADCB share value skyrocketed by 12%, while UNB’s shot up by 15%.

Reuters explains that while ADCB and UNB are both majority government-owned, Al Hilal Bank is fully-owned by the Abu Dhabi government.

“Considering the same primary owner, we believe it is fair to assume a relatively smooth transition of this deal, before the regulatory approval stage,” Bahrain-based securities firm SICO said in a statement.

Earlier this year, the Abu Dhabi government merged two of its sovereign wealth funds, consolidating its capital into one unified fund to bolster local and international investments.

The two wealth funds, the Abu Dhabi Investment Council (ADIC) and Mubadala Investment Co, were consolidated into a combined portfolio worth over $200 billion, a source told Reuters at the time.

As local and internationals conditions worsen, companies will be left with no choice but to merge as they brave the ever-more-troubling economy.

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