July 18, 2024

With declining profitability, the probability of a Merger Wave is very apt for the Gulf’s Banking Arena

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As according to the fresh ratings that were conducted out through the S&P Global Ratings as well as the statement provided through S&P Global executive Mohamed Damak, senior director for financial institutions ratings pointed out that: “Fresh wave of acquisitions as well as mergers would evolve within the GCC’s Banking arena with the profitability margins impacted due to relevant tremendous pressure as happened due to Pandemic-induced wave.”

Profits for most provincial lenders, unlike their global peers, withered the preceding year as they primitively allocated funds to protect the potential loan sufferers. Loan book evolution has also decelerated and margins are under tremendous stress amid historically low interest rates.

The senior most Director for the Financial institution’s ratings, Mohamed Damak further stated out that: “The requirements for recapitalization as supplies for bad loans upsurge and the asset quality depreciates also aid for the case specifically in the alliance of financial establishments in the territory.”

On Wednesday, Mr Damak told a webinar stated on that: “Ultimately, lower profitability could start a new wave of M&A, and we think this wave, if it starts, will be different from what we have been observing so far. It might involve alliance across diverse GCC nations, or alliance across different emirates here in the UAE.”

The first wave led to the conception of some of the robust financial institutions. First Abu Dhabi Bank, the UAE’s principal lender, was designed through the merger of National Bank of Abu Dhabi as well as First Gulf Bank in 2017.

Abu Dhabi Commercial Bank also finalized a three-way merger with Union National Bank and Al Hilal Bank in 2019. The preceding year, Dubai Islamic Bank finalized its procurement of competitor Noor Bank to generate an Islamic lender with overall assets of in excess of Dh275bn ($75bn).

Kuwait Finance House and Bahrain’s Ahli United Bank have also been in cross-border union consultations, but these were postponed in April last year.

GCC banks have already practiced substantial M&A movement after the three-year oil price deceleration that began in the middle of 2014. Shareholders who held stakes in more than one lender – typically native governments and related things – flock consolidation, creating stronger financial institutions with more robust balance sheets to better face threatening operating circumstances.

In Saudi Arabia, the kingdom’s major lender National Commercial Bank, is edging quicker to its takeover of minor rival Samba Financial Group that will produce a lender with a 31 percent market share by assets.

Mr Damak stated that “A new upsurge of mergers will be more resourceful and spurred by economic rationale.”

He also added that: “The higher cost of risk and the decline in margins will drive profitability down.”

Kuwait Finance House as well as Bahrain’s Ahli United Bank have also been in cross-border fusion talks, but these were deferred in April the preceding year.

“It would definitely require a more aggressive stance by managements to clear hurdles convincing for an illustration boards or shareholders to accept to be diluted,” he stated. “That body building might be informal if they have to recapitalize their banks anyway.”

S&P also stated that provided the threatening operating environment handled by the territories’ corporate arena, banks face a “lower-for-longer profitability” trend.

Moody’s Investors Services within October stated the requirement for union is more powerful among smaller banks who face being “crowded out” by larger participants.

He expects an upsurge in non-performing loans in the territory from 3.6 percent on an average the preceding year to about 5-6 percent in the next 12-24 months, as supervisors gradually extract tolerance measures.

“It remains to be seen whether we are going to see any additional intervention from the governments to reduce the risk of banks’ balance sheets,” he said.

In the UAE, the economy has been fortified by more than Dh388bn worth of native as well as federal sustenance measures to aid upon cushioning the effect of COVID-19 on the economy.

However, fluidity within the banking system is already back to pre-pandemic levels, the Central Bank of the UAE said earlier this week. Sectors including real estate, construction, hospitality and consumer-related business are likely to put pressure on banks’ asset quality going forward.



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