Three-way merger of UAE banks 'credit positive' for industry, says Moody’s

The potential merger of Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank would be credit positive for the country’s banking industry, according to Moody’s Investors Service.

"The merger would increase banks' pricing power, reduce pressure on their funding costs and increase their ability to meet sizeable investments," the rating agency said in a report on Monday.

It would also contribute to consolidation of the "overbanked" sector in the UAE.

ADCB, the second largest lender in the capital, said last week it is exploring the possibility of a merger with rival UNB and Sharia-compliant lender Al Hilal, which would create the Arabian Gulf's fifth largest banking entity with around $114 billion (Dh418bn) in combined assets.

The talks “are at a very preliminary stage and may not result in a transaction,” ADCB said in a statement to the Abu Dhabi Securities Exchange, where its shares are traded.

In a separate regulatory disclosure, UNB confirmed talks with ADCB, but did not mention any discussion with Al Hilal. Shares for ADCB and UNB rallied following the announcements.

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The potential merger is subject to approvals from the banks’ boards of directors, shareholders and regulators.

Banking competition in the UAE – where 60 banks serve a population of nine million – has intensified in recent years as lending opportunities dropped because of slowing economic and credit growth due to lower oil prices.

Lenders are increasingly focusing on high-quality borrowers at the expense of small-to-medium-sized enterprises, among which default rates are typically higher, Moody's said.

GCC banks are expected to perform better this year than last, as liquidity improves on a stronger economic environment and rebound in oil prices to above $70 a barrel from a three-year slump.

However, banks' profits will likely stabilise at a lower rate than in previous years, while margins will remain tight, analysts from Moody's and S&P have predicted this year.

“The competition for concentrated deposit sources, combined with the increase in US interest rates, is contributing to an increase in UAE banks’ funding costs,” Moody’s said.

The United States Federal Reserve is set to meet this month and is expected to raise interest rates. Actions by the Fed are closely mirrored by countries that have currencies pegged to the dollar. 

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Consolidation of the banking system will diminish the competitive pressure for funding and increase banks' scale and revenue base, the agency said.

Alliances among financial institutions are also taking place elsewhere in the region. HSBC and RBS' affiliates in Saudi Arabia, and Bank Dhofar and National Bank of Oman are set to tie-up.

The 2017 merger of First Gulf Bank and National Bank of Abu Dhabi to form First Abu Dhabi Bank – the largest bank in the UAE – has already provided significant synergies, both in cost efficiencies and business opportunities, said Emilio Pera, partner and head of audit Lower Gulf KPMG.  

"The latest potential merger in the UAE capital drives further consolidation in a market where top-line growth is pressured and there are more challenging regulatory and capital demands," Mr Pera said.

ADCB, UNB and Al Hilal have common shareholding, with Abu Dhabi Investment Council holding stakes of 63 per cent in ADCB, 50 per cent in UNB and 100 per cent in Al Hilal.

“We estimate that the combined entity would have assets of around $113bn, closer to the dominant [UAE bank] First Abu Dhabi Bank, which had $188bn of assets as of June 2018, and Emirates NBD, which had $130bn of assets as of June 2018,” the report said.