Arab Today, arab today banks in gulf face many consolidation obstacles
Last Updated : GMT 04:23:09
Arab Today, arab today
Arab Today, arab today

Banks in Gulf face many consolidation obstacles

Arab Today, arab today

Arab Today, arab today Banks in Gulf face many consolidation obstacles

Dubai - Arabstoday

Gulf Arab banks are considering consolidation as one way to build scale and better compete with larger international banks as domestic earnings growth is slowing, but face obstacles in the form of shareholder scepticism and a patchy regulatory framework. Mergers and acquisitions in the Gulf banking sector are seen to be most pressing in smaller but highly competitive markets such as the UAE and Qatar, where respectively 47 and 18 banks are active. Analysts say that as economies in the Gulf are expanding, consolidation would create regional champions that will play a bigger role in developing the local equity and debt capital markets at a time when their international counterparts may scale down their emerging markets presence due to new regulatory requirements on balance sheets. \"There is very strong appetite among the leading banks for regional consolidation driven by the desire to build scale, efficiency and importantly diversify risk away from a large concentration to their respective domestic economies,\" said Michael Helou, head of financial institutions groups, Middle East and North Africa, at Barclays in Dubai. The dominant regional lenders such as Emirates NBD, National Commercial Bank of Saudi Arabia and Qatar National Bank are still relatively small in size compared to global financial institutions such as HSBC, Citi and JPMorgan. In the absence of consolidation, regional banks would continue to see sluggish earnings growth and the region\'s economic development could be slowed, bankers and analysts say. In recent years, revenues at Middle Eastern banks, dominated by Gulf lenders, have already started to stagnate. In the period between 2005 and 2010 overall revenues for Mideast banks grew 12 per cent, but it slowed down to one per cent last year, while a similar trend took place in terms of revenue related to retail and corporate banking, data from The Boston Consulting Group show. \"The overall market profit pool will over time begin to be under pressure and given the restricted geographic market, banks will either have to successfully become international, which is a daunting challenge given the fragmentation of the overall GCC or Mena markets, or increase the size of the investment required in order to be meaningful in key markets like Saudi Arabia,\" said Philippe De Backer, partner and director, head of the global financial services practice at consultancy firm Bain & Co. Banks in the UAE, the Arab world\'s second-biggest economy, such as Emirates NBD and National Bank of Abu Dhabi, have built solid retail franchises and only in recent years beefed up activities such as investment and private banking in a bid to generate more fee income. They face stiff competition from international banks that have more experience and bigger balance sheets to support their business. Still, immediate consolidation seems far away as many of the banks\' main shareholders - local governments or merchant families - often prefer to retain control rather than engage in merger activity, some say. \"Banking is a particularly politicised sector, given the international focus and sensitivity to the banking sector in general, the required governmental approvals and many banks are majority-owned by prominent families or the governments themselves,\" said Nick Tomlinson, a Dubai-based partner specialising in mergers and acquisitions, or M&A, at international law firm Gibson, Dunn & Crutcher. In Dubai, for instance, the government and related entities hold key stakes in the largest bank ENBD, but also in Dubai Bank, Dubai Islamic Bank, Shuaa Capital and Noor Islamic Bank among others, complicating any possibly consolidation scenario. Dubai (Zawya Dow Jones) Bankers often cite the merger between Emirates Bank and National Bank of Dubai to form ENBD as the main example of a successful merger that turned the Dubai-based lender into one of the region\'s largest by assets. But apart from some smaller transactions, no large-scale mergers have materialised since the ENBD creation in 2007. Earlier in June in Qatar, Al Khaliji Commercial Bank and International Bank of Qatar said their proposed merger plan collapsed as both parties couldn\'t agree on the final terms, an example of how some of the few merger projects fail in sight of the finish line. \"M&A is on everyone\'s agenda but with the full realisation that it will be a challenge to succeed as everyone sees growth opportunities through identical strategies and all hoping that the others will give up the struggle for independence first,\" Bain & Co\'s De Backer said. Some smaller banks seem content playing a niche role. Sharjah-based United Arab Bank, with about 13 branches in the UAE and no international expansion plans, says it would rather focus on areas such as trade finance than compete on all fronts with larger competitors. \"We got a good market share [in trade finance] considering we\'re a very small bank. Then there are banks who try to be all things to all people and they\'ve got reasonable market share across all segments,\" said the bank\'s chief executive officer, Paul Trowbridge, in a recent interview. \"I think we specialize in specialisation. In other words we have distinct niches where we want to be.\" Among the problems banks also face is that exchanges in the Gulf Cooperation Council states either have no, or a relatively new and developing, takeover regime. For example, other than in the Dubai International Financial Centre, there are no mandatory sweep-up or statutory squeeze-out regimes in any of the GCC jurisdictions, which means 100 per cent control cannot in practice be achieved, Tomlinson said. From / Gulf News

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