More than a year after the initial onset of the coronavirus pandemic, the Gulf banking sector is experiencing a surge in mergers and acquisitions (M&A) as lenders continue to grapple with the economic fallout.
Indeed, in May last year, OBG anticipated that the COVID-19 pandemic, combined with the associated fall in oil prices, would accelerate a trend towards M&A among Gulf banks, with most institutions expecting limited profitability despite performing well on risk indicators.
A report published by S&P Global Ratings in March noted that the long-term adverse effects of the 2020 shock are likely to be felt particularly strongly in the UAE, Oman and Bahrain, and less so in Saudi Arabia and Qatar, and that a second wave of mergers and acquisitions could spread further across the region as the full impact of the subdued economic environment becomes more visible.
The so-called second wave follows an earlier spate of mergers and acquisitions in the region, most prominently seen in the UAE, triggered by the oil price slump in 2014.
One particularly emblematic alliance came in 2019 with the MENA region's largest merger to date, between Abu Dhabi Commercial Bank, Union National Bank and Abu Dhabi-based Islamic financial institution Al Hilal Bank. The merged entity became the third largest bank in the UAE, with an estimated $114.4 billion in assets.
Many analysts expected the Gulf banking sector to also respond to the coronavirus pandemic with increased M&A activity, as institutions seek to strengthen their resilience to future crises.
While much of the action has focused on the UAE, after two decades without bank mergers, Saudi Arabia has also seen two major developments in recent times.
In 2018, it was announced that Saudi British Bank and Alawwal Bank would merge. This move finally came to fruition in March this year, creating Saudi Arabia's third largest bank.
Even more significant has been the emergence of Saudi National Bank (SNB), which formally began operations on 1 April, making it the Kingdom's largest financial institution and a major regional player.
The entity was formed from the merger of two leading institutions, after National Commercial Bank combined with Samba Financial Group in a $15 billion deal last year. With more than $239 billion in total assets and $34 billion in equity capital, the new entity has strong liquidity and capital reserves. In its first quarter of earnings, it posted a net profit of $909 million.
The SNB has expansive strategic plans: according to global ratings agency S&P, it will "dramatically change the corporate lending landscape" both in the UK and the wider region. The new entity will finance economic development and support 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 foster the shift towards digital banking that has been accelerated by COVID-19, which offers a range of digital services and products to individuals, small and medium-sized enterprises and corporations alike.
Qatar also saw significant M&A activity in the immediate aftermath of the spread of COVID-19 in the region.
Masraf al-Rayan announced a potential merger with Al-Khaliji Commercial Bank on 30 June last year, an announcement that sent Al-Khaliji's shares soaring.
On 7 January this year, the Qatar Financial Markets Authority confirmed that it had approved the alliance, creating Qatar's second-largest lender, even if it is still six times smaller than Qatar National Bank, and one of the largest Shariah-compliant groups in the region.
Similar to SNB, the new entity is in a strong financial position with solid liquidity and is expected to help drive Qatar National Vision 2030.
With the COVID-19 pandemic gradually coming under control around the world, will this second wave of mergers and acquisitions continue?
The S&P report published in March argued that 2020 had seen the region's banks grapple with a "triple shock" to profitability, stemming from "slower credit growth, lower interest rates for longer and a higher cost of risk".
Although the situation appears to be improving in the second half of 2021, the residual effects of this triple shock are likely to push many banks to improve their resilience through consolidation with other entities. The report also argued that the ongoing second wave could also spur an increase in cross-border mergers and acquisitions, although it noted that this "would require more aggressive action by management than previously seen".
Indeed, a report published by Moody's last year noted that the push towards consolidation was particularly felt by smaller banks, which risk being "crowded out" by their larger peers.
Similarly, in March, a report published by consultancy Alvarez & Marsal said the UAE banking sector was set to see a greater amount of merger and acquisition activity.
The UAE has long been considered over-banked; there are currently 21 local banks and 27 foreign banks serving a population of less than 10 million people.
While several factors go some way to explaining the profusion of banks in the UAE, for example, the fact that it is made up of seven separate emirates, this figure suggests that there is scope for a reduction in the ranks.
Moreover, the planned acquisition of Bahrain's Ahli United Bank, its largest financial institution, by Kuwait Finance House, was postponed due to the pandemic, and so far no timetable for its continuation has been announced. If this M&A goes ahead as planned, it would create the sixth largest bank in the GCC, with more than $100 billion in assets.
Significantly, it would also transform Bahrain's largest bank into a Shariah compliant institution, in a sign of continued growth in the segment.