|07 August, 2019

Fitch Ratings: GCC Islamic Banks to Continue M&A to Boost Competitive Position

GCC Islamic banking M&A is driven by the search for competitive advantage to access growth opportunities and build low-cost deposits, as well as by cost synergies

Fitch Ratings-London/Dubai: Islamic bank mergers and acquisitions in the GCC region are likely to increase as many Islamic banks still lack the market position needed to compete with large established peers, particularly in overbanked markets such as the UAE, Fitch Ratings says. Consolidation should ultimately be positive for the Islamic banking sector by creating larger, stronger and more efficient Islamic banks. However, banks' Issuer Default Ratings will typically be unaffected, given that most GCC bank ratings are driven by our assumption that sovereign support will be provided to banks (directly or through a parent bank), if needed.

GCC Islamic banking M&A is driven by the search for competitive advantage to access growth opportunities and build low-cost deposits, as well as by cost synergies. Deals usually need government backing given the significant stakes that governments hold in most banks. Most Islamic bank M&A is between Islamic banks or involve a conventional bank acquiring an Islamic bank as a subsidiary. Islamic banks cannot easily acquire conventional banks. Integration risks can be high, especially when both Islamic and conventional banks are involved.

Islamic banking has been a growth area for the last ten years with most GCC countries trying to build their Islamic financing capabilities and create domestic Islamic finance hubs. Accessibility to Islamic products and instruments has grown rapidly with product innovation. However, in an overbanked region, some of the newer franchises have struggled to find good growth opportunities and to attract cheap and stable deposits, given the strength of existing competition. They have also been hindered by the ability of conventional banks in some countries to offer Islamic financing and take Islamic deposits.

The development of Islamic banking is following various paths in the GCC region. Kuwait restricts Islamic financing to Islamic banks to ensure clear separation between Islamic and conventional activities. This clarity has helped to develop a strong banking system split between five conventional and five Islamic banks, all with reasonable franchises and growth opportunities. Kuwait Finance House's aim to acquire Bahrain's Ahli United Bank and its Islamic franchise in Kuwait, if achieved, would make Kuwait Finance House the leading domestic Islamic bank in Kuwait and a big Islamic player in the region.

In the UAE, Dubai Islamic Bank and Noor Bank are likely to merge, which would create a more sophisticated leading Islamic player, benefiting particularly from cost efficiencies and product and business development. Dubai Islamic Bank is the oldest Islamic bank in the world with a 9% financing market share in the UAE. Emirates NBD, a leading conventional bank, has a unique business model in the UAE, doing most of its Islamic financing through a subsidiary, Emirates Islamic, rather than an Islamic window. It seems likely that Abu Dhabi Commercial Bank will adopt this model following its acquisition of Al Hilal Bank.

While many Islamic banks still lack a competitive market position, some strong Islamic franchises do exist. In Saudi Arabia Al Rajhi Banking and Investment Corporation, the largest bank in the Kingdom with a 17% market share of domestic credit, is also the world's largest Islamic lender, with total Islamic financing assets of USD97 billion at end-2018.

Saudi Arabia's second-largest bank, National Commercial Bank, is another example of a strong Islamic franchise. It is almost entirely focused on Islamic financing, although not all other assets are sharia-compliant. It is pursuing a merger with a conventional bank, Riyad Bank, although it may have to abandon its plan to fully convert to an Islamic bank if the merger proceeds.

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com 

© Press Release 2019

Disclaimer: The contents of this press release was provided from an external third party provider. This website is not responsible for, and does not control, such external content. This content is provided on an “as is” and “as available” basis and has not been edited in any way. Neither this website nor our affiliates guarantee the accuracy of or endorse the views or opinions expressed in this press release.

The press release is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Neither this website nor our affiliates shall be liable for any errors or inaccuracies in the content, or for any actions taken by you in reliance thereon. You expressly agree that your use of the information within this article is at your sole risk.

To the fullest extent permitted by applicable law, this website, its parent company, its subsidiaries, its affiliates and the respective shareholders, directors, officers, employees, agents, advertisers, content providers and licensors will not be liable (jointly or severally) to you for any direct, indirect, consequential, special, incidental, punitive or exemplary damages, including without limitation, lost profits, lost savings and lost revenues, whether in negligence, tort, contract or any other theory of liability, even if the parties have been advised of the possibility or could have foreseen any such damages.

More From Press Releases