"When the dust settles and the full effect of current conditions on banks' financials is visible, we think there could be a second wave of mergers and acquisitions, which will be more opportunistic and driven by economic rationale," Damak wrote in an opinion piece.
The S&P analyst said the second wave of M&A might involve consolidation across different GCC countries or emirates in the UAE, for example. "This could mean more aggressive moves by management than those seen in the past. The added hurdles of convincing boards and shareholders, who face the possibility of seeing their assets diluted or losing control, might be easier if they have to recapitalise their banks anyway."
According to S&P, the pandemic lockdown will halt the growth of GCC Islamic and conventional banks this year as they focus on preserving asset quality rather than business expansion. Although growth rates in 2019 were almost the same as 2018, GCC conventional banks saw faster increases than Islamic banks.
Even months before the epidemic outbreak, GCC banking sector was undergoing major consolidation phase with 20 banks negotiating mergers and acquisitions with an estimated $1 trillion worth of assets.
The UAE had been leading the drive with highest number of mergers both in terms of value and volume. In 2019, six mergers and acquisitions were being negotiated in the UAE worth $625.25 billion and two in Saudi Arabia worth $256 billion and one each in Kuwait and Oman.
Starting with the merger of Emirates Bank and the National Bank of Dubai to form Emirates NBD in 2007, the UAE set the trend and kept the momentum with the creation of First Abu Dhabi Bank through the merger of National Bank of Abu Dhabi and First Gulf Bank in 2017. In May 2019, Abu Dhabi Commercial Bank merged with Union National Bank in May and the new entity took over Al Hilal Bank as its Islamic arm. Dubai Islamic Bank was the latest to join the M&A spree, when it fully acquired Noor Bank in January.
Damak said Islamic banks are somewhat more vulnerable than their conventional peers since they tend to have higher exposure to the real estate sector due to the asset backing principle inherent to Islamic finance.- firstname.lastname@example.org