Dubai Skyline/Bloomberg

Economy

Gulf states confront new era of low oil prices with merger wave

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Banks across the Gulf are leading a record wave of mergers and acquisitions as governments look for ways to stay competitive and battle slow growth.

Tuesday 09, April 2019

(Bloomberg) -- From Dubai’s Burj Khalifa to Kuwait’s Al Hamra Tower, oil-rich Gulf economies built up their skylines in a hurry in the few years preceding the financial crisis. Now, as the price of the region’s most precious commodity languishes, a similarly frantic pace is on to merge some of the region’s banking and industrial behemoths.

In Saudi Arabia, the first bank merger in 20years is under way, as well as what’s set to be the Kingdom’s largest merger and acquisition (M&A) deal, the acquisition of SABIC by Saudi Aramco from the country’s sovereign wealth fund. This follows Saudi International Petrochemical Company’s agreement last year to acquire Sahara Petrochemical Company in an all-share deal valued at about $2billion.

Surging oil prices over more than a decade helped many Gulf states, which include the world’s biggest exporters of crude and liquefied natural gas, expand aggressively at home and abroad.

After crude prices nosedived in 2014, countries such as the UAE and Saudi Arabia the plug on spending. Over the course of the first quarter of this year, the price of crude has settled at a level that is barely high enough for Gulf Arab monarchies to balance their budgets.

There is almost no sector in the region that is not affected by oil. Most banks, for instance, are heavily reliant on government deposits, which have been dwindling in sync with crude prices. Lenders have also faced damped demand for credit and weakened loan performance as governments cut spending after oil’s slump.

The Gulf region is also heavily overbanked, with about 70 listed institutions serving a population of roughly 50 million, putting smaller lenders under pressure. As a rough comparison, there are only about a dozen listed banks in the UK, a country of about 65 million people.

Most lenders in the Gulf Cooperation Council member nations are at least partly owned by arms of their national governments, making consolidation easier. The restructuring is part of the GCC states’ larger plan to make their economies less dependent on crude as a source of long-term growth.

The recent merger mania in the UAE banking sector follows a relatively quiet decade for such deals. The U.A.E.’s first bank merger, in 2007, brought together Emirates Bank International and National Bank of Dubai.

The combined entity, Emirates NBD has more than trebled its profit since then, while net income has increased at a compound annual rate of 11 per cent from 2008 to 2018 despite some turbulent years after the global financial crisis.

In 2017 the consolidation of Abu Dhabi’s largest lenders, First Gulf Bank and National Bank of Abu Dhabi, created the region’s second-largest bank, First Abu Dhabi Bank and has since prompted a flurry of talks among competitors. Abu Dhabi Commercial Bank is in the process of merging with Union National Bank and Al Hilal Bank.

Abu Dhabi is considering combining Abu Dhabi Islamic Bank with First Abu Dhabi Bank to create the Middle East’s largest lender.

In Saudi Arabia, HSBC Holding’s local unit is close to acquiring Royal Bank of Scotland Group’s local venture in a $5billion stock deal, while the Kingdom’s biggest lender National Commercial Bank (NCB), started initial talks late last year with Riyad Bank for a merger.

Similarly, in Bahrain, Kuwait, and Oman, merger talks are also under way among banks.

Banks aren’t the only entities that are merging. Last year, Abu Dhabi combined Mubadala and the Abu Dhabi Investment Council to create a wealth fund with about $230billion in assets, just a year after Mubadala merged with International Petroleum Investment Company, another government-backed investment firm.

After pushing back its much-anticipated initial public offering to 2021, Saudi Aramco agreed last month to buy 70per cent of petrochemical giant SABIC from the Public Investment Fund, in a deal worth about $70billion. It would give the PIF, as the sovereign fund is known, the financial firepower it needs to carry out ambitious investment plans at home and abroad as Aramco’s own share sale stalls.

 

TAGS : PIF, Mubadala Investment Company , Saudi Aramco, SABIC, NCB, SABB, Riyad Bank, Al Hilal Bank, UNB, ADCB, ADIB, FAB, Emirates NBD

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