Sharjah's overbanked market hints at consolidation

With 45 commercial banks operating in the UAE, according to the country’s central bank, and a national population of 9.27m, according to World Bank figures for 2016, the Emirati financial services market is often described as overbanked and in need of consolidation. Pressure for such consolidation is increasing as intensifying regulatory requirements – driven by the move towards Basel III and the planned implementation of the International Accounting Standards Board’s ninth International Financial Reporting Standard (IFRS 9) in 2018 – push up costs. This is largely affecting smaller banks, including the four banks headquartered in Sharjah, as larger institutions are able to leverage their economies of scale. “Costs arising from the growing requirements for investments in technology, cybersecurity and the transition to artificial intelligence all encourage banking sector consolidation,” Sami Rashed Farhat, CEO and general manager at InvestBank, told OBG.

Others agree that consolidation could support the sector, and smaller institutions in particular. “Local banks are still profitable and growing,” Varouj Nerguizian, general manager at Bank of Sharjah, told OBG. “Mergers improve the capabilities of banks in terms of exposure and the ability to raise capital and bonds, and consolidation can give banks the size and depth to better serve their customer base,” he added.

Consolidation & Competition

Such a trend already appears to be under way in the country, although so far it only seems to be affecting larger institutions. In 2016 two of the country’s largest banks, National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), agreed to merge, forming a new institution called First Abu Dhabi Bank (FAB). The operation was completed in April 2017, with the new entity holding assets of around $181bn. This made it the largest bank in the country by a significant measure – ahead of Emirates NBD Bank, which had held the position prior to the merger, with assets of $122bn – and the second-largest bank in the GCC.

The trend towards consolidation may now have reached Sharjah. In November 2017 international media, citing unidentified sources, issued a report that Bank of Sharjah and InvestBank were engaged in merger talks. If such a deal were to proceed, the resulting bank would be the largest in the emirate, with assets of around Dh47.5bn ($12.9bn) – based on end of 2017 figures for Bank of Sharjah and InvestBank – ahead of market leader Sharjah Islamic Bank (SIB), which held Dh38.3bn ($10.4bn) in total assets at the end of 2017. Such a move could bolster the ability of the local banking sector to compete with larger institutions from other emirates.

Mergers

Reports of this possible merger arrive against a wider backdrop of consolidation in the GCC. In October 2017 regional media, citing Omani investment firm U Capital, reported that at least five banking mergers or acquisitions talks were under way, including three deals involving Islamic banks. These included merger negotiations between Ahli United Bank, the largest bank in Bahrain, and Kuwait Finance House, Kuwait’s biggest Islamic bank, which is one of the major shareholders in SIB. The country’s financial services sector has witnessed false starts as regards consolidation before. The 2007 merger that created Emirates NBD – which took place between Emirates Bank and National Bank of Dubai – raised expectations of a wave of mergers, but this did not ultimately materialise: the next notable merger was in 2013, when Dubai Bank merged with Emirates Islamic Bank, after which there was little activity until the merger in 2016 between NBAD and FGB. Industry observers argue that while consolidation is desirable given the large number of banks in the country, it remains unlikely to happen on a large scale, considering factors such as the identification of banks with the emirates in which they are headquartered, in addition to the frequent part-ownership of banks by the governments of individual emirates, which often rely on local institutions to provide them with financing.