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The amalgamation will combine the strengths of both banks, creating a massive entity--the largest banking institution in MENA
Word started to spread on the grapevine in the last week of June on the potential merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), which has kept the market buzzing. A week later, on 3 July 2016, both parties officially announced that they will move forward with the merger, laying down the bricks and time frame for the amalgamation.
The boards of directors for both NBAD and FGB have voted unanimously to recommend to shareholders a merger of the two Abu Dhabi-listed banks. The proposed merger will create a bank with the financial strength, expertise, and global network that is expected to support the UAE's economic ambitions both locally and globally.
"The new, well-balanced bank will be an engine of UAE growth, driving further investment and economic diversification, and advancing the ambitions of entrepreneurs and the people they employ. The bank will have the strength and expertise to support the development of the UAE's private sector, from SMEs to large companies gathering strength to expand beyond their national borders. It is well-positioned to be the strategic banking partner to the government and its agencies," said H.H. Sheikh Tahnoon Bin Zayed Al Nahyan, Chairman of FGB.
According to an official statement issued on the merger, the combined bank will retain NBAD's legal registrations and the brand name of 'National Bank of Abu Dhabi'. It will be the largest bank in the MENA region, with AED 642 billion ($175 billion) in assets and a combined market capitalisation of approximately AED 106.9 billion ($29.1 billion).
It will be the leading financial institution in the UAE, with a 26 per cent share of outstanding loans, and will operate an international network of branches and offices spanning 19 countries. Both entities will continue to operate independently until the merger becomes effective, which is expected in the first quarter of 2017.
Strategy
The proposed transaction will be structured as a merger of equals and will be executed through a share swap, with FGB shareholders receiving 1.254 NBAD shares for each FGB share they hold. The exchange ratio implies a discount to FGB's shareholders of 3.9 per cent based on closing share prices on 30 June 2016, and a discount of 12.2 per cent to the three months' average pre-leak share price as on 16 June 2016. Following the issue of the new NBAD shares, FGB shareholders will own approximately 52 per cent of the combined bank and NBAD shareholders will own approximately 48 per cent. The Government of Abu Dhabi and related entities will own approximately 37 per cent. On the effective date of the merger, FGB shares will be delisted from the Abu Dhabi Securities Exchange.
According to the statement issued by both parties, economies of scale will help maintain a lean and efficiently run organisation. The merger is expected to deliver cost synergies of approximately AED 500 million ($136 million) annually. Cost benefits are expected to be realised over three years, and the one-time integration costs are expected at approximately AED 600 million ($163 million).
The combined bank will offer the potential for revenue synergies with enhanced product suite of banking products and services across a larger, combined platform. It will have the capital strength and strong core liquidity to pursue a range of high growth opportunities. These include opportunities in home market, supporting UAE corporates with international ambitions, leveraging an enhanced technology platform, more effectively using the expanded distribution capabilities and increasing wealth management cross-selling activity.
The merger is subject to a number of conditions, including the approval of the merger by at least 75 per cent by value of the shares represented at quorate general assembly meetings of FGB and NBAD. The merger is also subject to receipt of all required regulatory approvals.
Credit Suisse and UBS Investment Bank are acting as financial adviser to NBAD and FGB, respectively, while Allen & Overy and Freshfields Bruckhaus Deringer are acting as legal adviser to NBAD and FGB, respectively.
Structure and organisation
The combined bank's board will include four nominated directors of FGB and four nominated directors of NBAD. H.H. Sheikh Tahnoon Bin Zayed Al Nahyan, who is currently Chairman of FGB, is the Chairman designate. H.E. Nasser Ahmed Alsowaidi, who is currently Chairman of NBAD, is the Vice Chairman designate, and Abdulhamid M. Saeed, who is currently Board Member and Managing Director of FGB, is the Chief Executive Officer designate for the combined bank. The new board and management will assume their new roles when the merger becomes effective; until then Andre Sayegh and Alex Thursby will continue to lead their banks independently as Group Chief Executive Officers of FGB and NBAD respectively.
In terms of human capital, the proposed entity plans to combine the two successful groups of employees into a unified, customer-driven culture, based on the shared values of enterprise, teamwork, empowerment and accountability. Attracting and developing high-performing UAE nationals is a central priority.
Financial benefits
The combined bank is expected to benefit from strong financial metrics. Its pro forma tier one ratio is 15.7 per cent, well above the UAE Central Bank's prescribed minimum of eight per cent, and its pro forma total capital ratio is 16.9 per cent. The combined bank's funding profile will be diverse, with pro forma wholesale funding accounting for 30 per cent of the total, customer deposits making up 69 per cent and other liabilities accounting for one per cent. Pro forma deposits are well-diversified, with corporate deposits accounting for 33 per cent, government and other public sector deposits 33 per cent, and retail deposits 22 per cent. The combined bank's pro forma loan-to-deposit ratio is 94 per cent. Together, its key profitability metrics are among the best in the sector, with a pro forma net interest margin of 2.30 per cent, a cost-to-income ratio of 30 per cent and a return on average equity of 14.1 per cent.
Broad outlook
Speaking exclusively to Banker Middle East, Khalid Howladar VP-Senior Credit Officer at Moody's said, "Both banks have relatively high deposit ratings from Moody's (FGB A2/stable and NBAD Aa3/Negative) reflecting their strong individual credit profiles. With regards the GCC, banks in general are facing a more pressured operating environment on both sides of the balance sheet; asset growth and quality is weakening due to lower economic growth and liabilities are much more expensive, as regional liquidity remains tight despite some recovery in the oil price and recent jumbo sovereign debt issuances. Nonetheless, compared to other parts of the world, GCC bank solvency profiles remain strong and they are still reasonably profitable, so the drive for consolidation is not as strong--particular in the stronger countries (Kuwait, Qatar, UAE and KSA). Regional and global ambitions may also play some role as these countries seek to expand their role in the global finance and diversify their economies away from oil."
"There is immense opportunity in our home market and in the countries where the UAE is building stronger economic relationships, especially those across the Middle East, Africa, and Asia. UAE's process of economic diversification will involve further investment in infrastructure, private sector development and will require a greater role from the private sector. The new bank will be well positioned to be the strategic banking partner to the government and its agencies. This will be a new kind of bank for the UAE, and a bank better positioned to provide an expanded range of products and services to our customers," said Abdulhamid M. Saeed, Chief Executive Officer Designate, commenting on the merger.
Sharing similar sentiments, H.E. Nasser Ahmed Alsowaidi, Chairman of NBAD said, "The combined bank will have the capital, expertise and international networks to be the preferred financial partner for anyone doing business internationally, and for global businesses and governments that want to access regional and global markets. Our scale, diversified assets and superior technology will provide the competitive advantage needed to lead in the new banking environment of more stringent regulation, digitalisation and demand for personalised services."
Playing on the strength of both banks, the merger will result in the combination of two best-in-class consumer and wholesale businesses. FGB has a prominent consumer banking franchise, with one of the strongest credit card offerings in the UAE and a long-standing National Housing Loan programme run for the Abu Dhabi Government, while NBAD is known for wholesale banking and capital markets advisory with strong international connectivity. The combined bank will be well-diversified, with loans to the corporate sector representing 52 per cent of the total loan book, loans to the retail sector accounting for 26 per cent, and loans to the sector representing 22 per cent. It will have presence in 19 countries, and be well-positioned in key financial centres including Singapore, Hong Kong, Geneva, London and Washington DC.
© Banker Middle East 2016
