London: Merger and acquisition (M&A) activity among the Gulf Cooperation Council (GCC) banks is still unusual, despite a tougher operating environment across the region, says Fitch Ratings.
Even in cases where mergers appear to make sense, such as the planned merger of Bank Dhofar and Bank Sohar in Oman, negotiations can be protracted and difficult. The Omani banks called off the merger last week.
Banks across the region are facing some pressure on profitability and a tightening of liquidity, especially in countries where public sector deposits are being withdrawn from the banks to shore up government finances. The Outlook for the Long-Term Issuer Default Ratings in Oman and Saudi Arabia is Negative, reflecting the sovereigns’ weakened ability to support the banks, should the need arise, and deteriorating operating environments. We downgraded the standalone Viability Ratings (VR) of 11 GCC banks in 2016, highlighting that there is deterioration in key rating factors, such as a weaker operating environment, more negative trends in asset quality, and some pressure on earnings, profitability and liquidity.
Despite this, we do not expect to see much consolidation among GCC banks. The UAE may well be the exception to the rule, as weaker oil prices and a tougher operating environment begin to weigh on profitability and encourage banks to seek out synergistic cost savings. Competition among the UAE’s 50 banks is fierce. The merger of First Gulf Bank and National Bank of Abu Dhabi, announced in July 2016, appears to be on track for completion, scheduled by 1Q17. The merged entity will become Abu Dhabi’s clear market leader, with a share of around 25%.
The small number of local banks operating in some countries, such as Saudi Arabia (12), Qatar and Kuwait (each with 11), limit competition and help support profitability at high levels, meaning there is little incentive to merge and cut costs. We consider Bahrain’s banking sector, and particularly its Islamic banking sector, to be overbanked. We think the entire banking sector would benefit from consolidation because many of the banks lack sufficient scale. Some M&A activity is taking place across Islamic banks, encouraged by the central bank, but no major consolidation appears to be on the cards.
The ownership structure of GCC banks where well established local private shareholders often control sizeable stakes, and foreign banks only hold minority stakes, is also a stumbling block to successful merger activity. To date, the majority of M&A transactions concluded among GCC banks have involved some form of rescue operation, with a stronger bank acquiring a weaker, or failed, bank. Even these cases have been few.
