A proposed merger between three Qatari banks -- Masraf Al Rayan, Barwa Bank and International Bank of Qatar -- if successfully completed, would create the largest Islamic bank and second largest bank in Qatar, and would result in a more balanced competitive environment in Qatar's fragmented banking system, said Moody's Investors Service in a report published yesterday.
The merger is currently at due diligence stage and will be subject to approval by the relevant authorities and the three banks' shareholders. Moody's notes that there would likely be considerable integration challenges with this merger.
"The merged entity between Masraf Al Rayan, Barwa Bank and International Bank of Qatar would help to rebalance the Qatari banking sector," said Nitish Bhojnagarwala, Assistant Vice President at Moody's. "Currently in Qatar, 18 banks serve a population of only 2.6 million, and Qatar National Bank - the largest bank in the Gulf Cooperation Council -- dominates the market.”
Moody's expects the enhanced franchise of the merged entity to benefit from the growth of Islamic assets in the Gulf Cooperation Council. "Islamic banking asset growth has outpaced conventional banking in Qatar, as demonstrated by a 21 percent compound annual growth rate of loans for Islamic banks between 2011 and 2016 compared with 14% for the conventional banks," explained Nitish. Moody's expects, however, that there would be considerable integration challenges with this merger, which will be assessed in the event that the deal is agreed. At that time, the rating agency will also assess how the structure and strategy of the merged entity could alter the group's overall risk profile, both in terms of solvency (capital and profitability) and liquidity (liquid assets and access to funding).
The issue of consolidation in the Qatari banking system came to the fore in December 2016, when the three Qatari lenders announced that they are exploring the possibility of a three-way merger.
The merger would strengthen the overall business proposition and product diversification of the combined entity given their individual segmental strengths. Masraf Al Rayan’s loans to the government and public sector entities representing around 50 percent of its financing book. Barwa has a solid consumer and corporate business and IBQ is a niche player in private banking.
The expanded capital base of the merged entity would also enable it to participate in larger regional syndicated loans thus providing some geographical diversification. At the same time, given the small size and limited opportunities in the home market, a merger of local banks is a relatively less risky inorganic growth strategy unlike some of their Qatari peers who have expanded internationally into jurisdictions (other Middle Eastern and African countries) which are relatively riskier than their domestic Qatari system.
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