The merger of National Bank of Abu Dhabi and its closest rival in town, FGB, may be a great thing for Abu Dhabi and the banks in question, but it may also put pressure on the other banks and financial institutions in the UAE that it will tower over.
The combination of the Emirate’s two biggest banks by assets will create a lender that can more than compete with Dubai’s largest lender, Emirates NBD, giving the new bank access to cheaper borrowing, improving its growth prospects, cutting costs and hopefully boosting its bottom line.
NBAD and FGB combined will have US$175 billion in assets, eclipsing Emirates NBD’s $113bn. Total assets of banks in the UAE at the end of May were Dh2.51 trillion, or about $683bn, according to the latest banking data, meaning the new combined bank and Emirates NBD would hold 42 per cent of all assets.
Not only would the new superbank be the biggest by assets in the UAE, but it would also be the largest in the Middle East.
Qatar National Bank is currently the region’s biggest lender, with total assets at the end of March of 550bn Qatari riyals (Dh554.7bn).
James Burdett, the chief financial officer of NBAD, said the proposed merged entity would have a market share of 26 per cent and did not discount the possibility of NBAD acquiring more assets down the line when he spoke to investors after the announcement on July 3.
“My sense is we have got enough on our hands bringing these two great institutions together, to think about folding in more institutions in the current time frame, but you never rule these things out,” he said.
“What I would say though is I do believe consolidation will continue to happen in this market. I think it makes a lot of economic sense. We have always thought it was a matter of when and not if, so I think you will see more consolidation.”
The merger of NBAD and FGB could thus end up squeezing smaller players who do not find similar tie ups.
The problem that arises, however, is that the ownership structure of many of the smaller banks, many run by families, may make merger talks long and drawn out. Banks that are owned in part by the public or large families may not want to be swallowed up by bigger banks, and so deals may not be as smooth as that between NBAD and FGB, which are controlled by the government and the rulers of Abu Dhabi.
More than 50 banks and financial institutions serve 9 million customers in the UAE, making it one of the most crowded banking markets in the region.
The urgency to consolidate may become greater for UAE banks after Britons voted to leave the European Union in their June 23 referendum. Local banks have had a difficult couple of years amid the crash in oil prices, and the introduction of a new crisis, such as the exit of the UK from the EU, may cut global growth even more and reduce demand for oil and other hydrocarbons.
The risk of a Brexit could also keep the US Federal Reserve from raising interest rates and that would also put a damper on the margins that UAE banks get from giving out loans.
The more the crises pile up, the greater the likelihood that banks in the UAE will be compelled to join forces.
Mahmoud Kassem covers banking and finance for The National.
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