More Islamic and conventional banks in the GCC are likely to merge in the coming future, according to an expert on the topic.
“As most GCC countries became overbanked and saturated by the number of operating banks, mergers are now considered as a natural path towards sector consolidation, in order to create larger entities that are financially more robust and efficient, as they benefit from more economies of scale,” says Anthony Hobeika, chief executive officer at MENA Research Partners, to AMEinfo in an exclusive interview.
Increased interest in mergers
According to a report released on September 25 by Ubhar Capital, a full service investment firm, amongst the ongoing or rumoured M&A, three are currently in the Islamic banking space and two in conventional.
The report said that the creation of bigger Islamic banks has become necessary, as these could not only rival other Islamic banks in the region, but also conventional banking giants.
“New in the region, the small size of Islamic banks is a factor that hurts them more, forcing them to look for different ways of survival. Such is the scale of the top four conventional banks that their assets cover up the entire assets of Islamic banks in the GCC. The combined assets of four conventional banks stand at $621 billion, whereas the assets of all of the Islamic banks in the GCC stand at $563bn as of Q2 2017.”
Hobeika reiterates these views, explaining that Islamic banks are relatively small compared to conventional banks and this is a key catalyst for mergers, which will create scale and thus benefit from the long-term growth cycle of Islamic finance industry.
“While merger announcements were numerous in the past, with only a few materialising, the current economic and market context is another trigger for ‘merging to survive’, with respect to the small- to mid-sized banks, should they want to compete with the larger and more established peers,” he adds.
Hobeika further notes that the GCC banking sector has total assets worth $2 trillion, with the UAE accounting for 30 per cent or $610bn.
Mergers reap good results
The history of bank mergers in the region shows fruitful results and proves to be a good example for similar future plans.
For instance, the merger in 2007 between Emirates Bank International (EBI) and the National Bank of Dubai (NBD) to create Emirates NBD became a regional consolidation blueprint for the banking and finance sector, as it combined the second- and fourth-largest banks in the UAE to form a bank capable of delivering enhanced value across corporate, retail, private, Islamic and investment banking throughout the region.
According to a study by Manuel Fernandez and Rajesh Kumar, associate professors at Skyline University College and Academic City Dubai, respectively, the total income of the two banks reached AED 7.1bn, an increase of 50 per cent year on year.
“The group became a major player in the corporate banking arena, with a joint market share of almost one-fifth of corporate loans. This strategic merger was meant to create a bank with scale, financial strength and service quality standards to compete effectively in a dynamic market,” say the professors in a study.
Hobeika agrees, saying that creating larger entities offer the potential to benefit from more scale, to reduce inefficiencies and to weigh in favour of regional and international expansion.
“At the banking sector level, such changes come in favour of better liquidity management, enhanced profitability and increased job creation in both volume and quality. At the regulatory level, mergers will push authorities to further strengthen their legal, supervisory and licensing frameworks,” he adds.
Impact of mergers on jobs
While some argue that banks mergers may leave many employees worried about their positions or the changing culture of the company, Hobeika believes that, in the long run, as banks grow geographically and scale up into new business lines, this will result in job creation, because banks will be put on a path of higher growth.
“In the short term, any merger would result in job destruction duplicate titles, while creating opportunities in more growth roles,” he concludes.