How consolidation is changing the GCC banking sector

The Gulf banking sector has witnessed an increase in mergers and acquisitions (M&A) in recent years, as lenders continue to deal with the economic headwinds associated with the Covid-19 pandemic. At the outset of the pandemic in the first quarter of 2020 it was anticipated that the economic slowdown and the associated fall in oil prices would accelerate the M&A trend among banks in the region, with most institutions expecting constrained profitability despite performing well on risk indicators.

Pandemic Effect

A report published by ratings agency Standard & Poor’s (S&P) in March 2021 noted that the long-lasting adverse effects of the 2020 shock were likely to be felt particularly keenly by banks in the UAE, Oman and Bahrain, and less so in Qatar and Saudi Arabia. The report postulated that a second wave of M&A could sweep further across the region as the full economic impact of the pandemic became apparent and many institutions sought to strengthen their resilience against future crises.

This would not be the first wave of consolidation in the face of economic pressure in the region. The so-called second wave follows an earlier series of M&A deals – seen most prominently in the UAE – triggered by the 2014 decline in oil prices.

Consolidation continued in the years leading up to the pandemic. A particularly emblematic merger came in 2019, marking the MENA region’s largest tie-up to date, between Abu Dhabi Commercial Bank, Union National Bank and the Abu Dhabi-headquartered Islamic finance institution Al Hilal Bank. The merged entity became the UAE’s third-largest bank, with an estimated $114.4bn in assets at the time.

Major Deals

Qatar saw significant M&A activity in the immediate aftermath of the outbreak of Covid-19. Islamic bank Masraf Al Rayan announced a potential merger with Al Khaliji Bank in June 2020. In January 2021 the Qatar Financial Markets Authority – which regulates and supervises the country’s financial markets – confirmed that it had approved the tie-up. The deal, which was completed in November of that year, created Qatar’s second-largest lender and one of the region’s largest sharia-compliant groups. It had around QR192bn ($52.7bn) in assets at the time of the merger. The banks merged to become one legal entity bearing the name Masraf Al Rayan on November 30, 2021. The merger was considered an important milestone for the Qatari banking sector as it reflected the market’s growing maturity and its ability to facilitate large-scale deals and investment.

After two decades without any bank mergers, Saudi Arabia has also seen two major developments in recent years. Prior to the pandemic, in 2018 SABB and Alawwal Bank announced their intention to merge. The deal was finalised in March 2021, creating Saudi Arabia’s third-biggest bank by assets.

Even more significant was the establishment of Saudi National Bank (SNB), which formally began operations on April 1, 2021. It is the largest financial institution in the Kingdom and a major regional player. The entity was formed out of the merger of two leading institutions, after National Commercial Bank combined with Samba Financial Group in 2020 in a $15bn agreement. With more than $239bn in total assets and $34bn in shareholder equity following the merger in April 2021, SNB has strong liquidity and capital buffers. In its maiden earning quarter, the bank posted net income of $909m. As part of its strategic expansion plans, SNB aims to finance large-scale economic development projects and support the goals of Vision 2030, as well as expand and deepen trade and capital flows between Saudi Arabia and the rest of the world.

Another important focus of SNB will be to nurture the shift towards digital banking that has been accelerated by the pandemic, offering a range of digital services and products to individuals, small and medium-sized enterprises, and corporations.

Future of M&A

With pressure from the pandemic easing after widespread vaccination campaigns throughout the region and improvements in supply chain disruptions, questions remain about whether the M&A trend will continue. An S&P report published in March 2021 argued that 2020 had seen the region’s banks grapple with a “triple shock” to profitability, stemming from “lower lending growth, lower-for-longer interest rates and higher cost of risk”. The report also argued that the ongoing second wave could spur increased cross-border M&A, although it noted that this would “require more aggressive moves by management than seen previously”. While the situation improved over the course of 2021, residual effects of the triple shock will still likely push some banks in the region to enhance their resilience by consolidating with other entities.

Crowded Space

An additional factor is the proliferation of banks in the region. A report published by credit ratings agency Moody’s in 2020 noted that the move to consolidate was felt particularly keenly by smaller banks that risk being crowded out by larger peers. Similarly, in March 2021 a report published by consulting firm Alvarez & Marsal said that the UAE banking sector was set to see an increase in of M&A activity. The UAE has long been seen as overbanked; there were 22 local banks and 27 foreign banks serving a population of fewer than 10m people as of 2021. While various factors go some way towards explaining the profusion of banks in the UAE – for example, the fact that it is made up of seven distinct emirates – this figure suggests that there is scope in the market for further consolidation.

Elsewhere, the planned acquisition of Bahrain’s Ahli United Bank, its largest financial institution, by Kuwait Finance House (KFH), was postponed due to the pandemic. In July 2022, almost four years after the transaction was first announced, Kuwait’s central bank approved KFH’s $11.6bn offer. The acquisition was completed in October, creating the GCC’s seventh-largest bank, with over $100bn in assets. This tie-up transformed Bahrain’s biggest bank into a sharia-compliant institution, in a sign of continued potential for growth in the segment.

An improved business climate, a shift towards economic recovery, significant government stimulus during the first year of the pandemic and cheaper finance helped to create a record year for M&A in 2021, with banking consolidation activity reaching an all-time high in markets around the world. According to a report from financial markets platform Dealogic, global banking M&A activity totalled $5.6trn in 2021, up 63% from 2020’s figure and considerably higher than the previous record of $4.4trn, which was set in 2007. While M&A activity among Gulf banks is unlikely to maintain the record-setting pace seen in 2021 – amid the global economic uncertainty generated by Russia’s ongoing invasion of Ukraine and continued monetary policy tightening the US – structural factors are expected to drive further consolidation in the market over the coming years.

Indeed, while acknowledging the challenges to M&A growth, KPMG expects activity to remain strong for some time, considering the volume of new pitches towards the end of 2021, which are expected to come to fruition in 2022 and beyond.