GCC sovereigns are still reliant on oil which accounts for three-quarters of the six-nation bloc’s spending, the instability associated with oil prices, lower crude oil output as well as tighter financial conditions pose a challenge for the region’s banking sector. Growth in banking assets is linked to regional GDP, which moves largely in tandem with oil prices.
Since 2014, the Arabian Gulf countries have been struggling with low crude prices, a situation that has caused governments to calibrate budgets and dip into state deposits. Moody’s expects GCC sovereigns’ fiscal deficits to widen by 6.9 per cent of GDP in Kuwait, 3.7 per cent in Oman and one per cent in Saudi Arabia this year, compared to the rating agency’s 2018 estimates.
Additionally, the rating agency also expects a small fiscal deficit in the UAE, where it had previously projected budgetary surpluses in 2019. In Bahrain, fiscal deterioration on account of more moderate oil prices is expected to be balanced by financial aid from the Kingdom’s wealthier Gulf allies.
Property slump woes
UAE lenders are also struggling with problem loans owing to the property and retail slump. According to S&P Global, a supply glut has built up even as demand faltered, feeding what the rating agency is calling the market’s long decline that has seen prices and rents drop by as much as a third since peaking in 2014.
The property sector contributes around 14 per cent to Dubai’s economic output, S&P said that it expects a negative outlook for the industries that are exposed to the real estate sector ranging from banks to insurance. Meanwhile, the situation is different in Saudi Arabia where banks are set to benefit from the economic reform programme which incorporates real estate and infrastructure development.
The Crown Prince Mohammed bin Salman’s Vision 2030, a grand vision to diversify the economy, include the futuristic city the NEOM which is expected to start taking shape in the first quarter of 2019, with the main city opening five years later. The $500 billion-Red Sea coast planned city revolves around artificial intelligence (AI) and is one of Saudi Arabia’s megaprojects that is projected to attract billions of foreign investors.
Additionally, state-owned Saudi Real Estate Refinance Company recently issued SAR 750 million ($200 million) Sukuk, the real estate giant seeks to refinance 20 per cent of the Kingdom’s primary home loans market, which authorities hope to expand to SAR 500 billion by 2020 and SAR 800 billion by 2028.
The sovereign wealth fund owned firm plans to accelerate housing construction by injecting liquidity into the real estate market. However, regional lenders are coming up with new business models to protect them from the impact of slowing economic growth in the region. There is a growing wave of lenders exploring mergers to stay competitive as well to be leaner and efficient in tough conditions.
According to Moody’s, in 2019, the GCC bloc will face weaker oil output than in 2018, due to the production cuts agreed by OPEC+ in December 2018 and together with lower oil prices, this will put pressure on fiscal deficits, weakening external positions as well as impacting the credit profile of lenders in the region.
Mergers and Acquisitions
Slower economic conditions, fragmented banking systems and competition are driving mergers and acquisitions across the Gulf region, Moody’s said. The UAE and Saudi Arabia based lenders are expected to benefit from their respective government’s increased spending which will see an increase in lending growth in 2019.
Moody’s added that lending will range from five per cent in Saudi Arabia and Kuwait and six to seven per cent for remaining Gulf countries due to the increase in construction and real estate activities. Several mergers and acquisitions are underway in both Saudi Arabia and the UAE – the two main overbanked territories in the GCC.
Similarly, across the entire region banks are rapidly consolidating with more than a dozen tie-ups projected to be closed this year alone, a move which is expected to boost the sector’s capacity to finance projects and businesses at the same time supporting economic growth.
Compared to Saudi Arabia which has 28 lenders catering for 33 million people, the UAE has around 60 banks serving a population of about nine million and competition has intensified in recent years between banks—as lending opportunities have dropped due to a slowing economy as well as a struggling real estate industry.
Moody’s said that the outlook of the UAE’s banking sector will remain stable, reflecting a gradually recovering economy and banks’ strong capital, resilient profitability as well as solid funding.
The merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) in 2017—which resulted in the formation of First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest after Qatar National Bank in GCC region, marked the beginning of synergies in the UAE banking industry.
Additionally, Abu Dhabi Islamic Bank (ADIB) is reportedly weighing strategic options for its business, including a potential merger. The lender is said to be planning to acquire another banking entity rather than being taken over—although a formal process has not started.
Similarly, in January Abu Dhabi Commercial Bank (ADCB) and United National Bank (UNB) agreed to merge and together acquire Al Hilal Bank. The tie-up will create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country.
The merged entity will carry the ADCB identity and Al Hilal Bank will retain its existing name, brand as well as operate as a separate Islamic banking entity within the group. The Government of Sharjah came to the rescue of Invest Bank in January by proposing to buy shares for AED 0.70 ($0.19) each, against the last traded price of AED 2.40, after the Central Bank of the UAE (CBUAE) ordered it to take losses that wiped out its capital base.
The central bank had asked the lender to book provisions worth AED 2.2 billion ($599 million), which would have wiped off its equity of AED 2.15 billion. According to Fitch Ratings, smaller and mostly family-owned lenders in the UAE, have lost market share to the top four lenders, which now control around 65 per cent of banking sector loans.
In Saudi, the Saudi British Bank (SABB) and Alawwal agreed to enter into a binding merger agreement in the second half of 2018 having started discussions on a potential merger in April 2017. Alawwal bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets.
On completion of the merger, SABB will continue to exist and Alawwal bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal bank.
Similarly, Saudi Arabia’s National Commercial Bank (NCB) and Riyad Bank have reached an advanced stage on the proposed merger that will create the Gulf’s third-largest lender with $182 billion in assets.
NCB hired JPMorgan Chase and Riyad Bank said that it is working with Goldman Sachs to advise on the potential tie-up. The Kingdom’s sovereign wealth fund owns a 44 per cent stake in NCB and about 22 per cent of Riyad Bank, which is likely to make the consolidation process easier.
Kuwait Finance House (KFH) is also pursuing a potential merger with Bahrain’s Ahli United Bank (AUB), reviving earlier talks for a deal that will create a new Islamic lender worth $92 billion in combined assets. KFH and AUB formalised the deal in January and the tie-up is going to be the first major cross-border merger in the Gulf region in recent years.
The lenders have been in merger talks since mid-2018, agreed on a preliminary exchange ratio of one KFH share for every 2.326 AUB shares but they have not revealed the share prices for the exchange ratio.
In Oman, Alizz Islamic Bank and Oman Arab Bank (OAB) announced that they were exploring the possibility of a strategic collaboration that may lead to an eventual merger in May 2018. Moody’s said that the possible tie-up between the two Muscat listed lenders would be credit positive for OAB and it will form an Islamic banking entity with around $7.6 billion in assets.
The merger is expected to help the banks capitalise on the fast-growing Islamic banking segment in Oman, despite the rating agencies’ negative outlook on the Sultanate’s banking system. According to Moody’s OAB has a seven per cent market share in terms of total assets (conventional and Islamic), while Alizz has a larger share of the Islamic assets market at 15 per cent as of the end of 2017 compared with two per cent for OAB.
However, another tie-up which was expected in Oman between the National Bank of Oman (NBO) and Bank Dhofar was cancelled after seven months of talks. NBO and Bank Dhofar announced that they have decided to discontinue the merger discussions after the parties could not agree on terms for the possible merger transaction, without offering details on issues that have caused the merger talks to fail.
GCC countries are committed to economic diversification programmes which are expected to create more opportunities for Gulf lenders. The oil and property slump in 2014 was a wakeup call for the GCC region as well as its lenders. Bahrain is maintaining a leading role in fintech industry, promoting opportunities while revising regulations and collaborating with other regulators.
Saudi Arabia and the UAE restructured their legal frameworks in a bid to increase foreign direct investments (FDI) and do away with reliance on oil. Saudi Arabia’s new debt law, as well as the UAE’s federal debt law, were lauded by international banks operating in the region such as Deutsche Bank and Standard Chartered, who are expecting more business opportunities this year.
© 2019 CPI Financial. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info).