Despite confirmed reports that three of the United Arab Emirates’ biggest banks are in talks to merge, creating the Gulf's fifth-biggest bank, a report published on Monday found that profitability among the country’s lenders continued to rise during the second quarter of 2018.

Abu Dhabi Commercial Bank (ADCB) said it is in early merger talks with Union National Bank and Al Hilal Bank, which could potentially form a lender with $113 billion in assets, Reuters reported. (Read the full report here).

ADCB, the second largest bank in Abu Dhabi, and UNB are both majority government owned, while Islamic lender Al Hilal Bank is fully-owned by the Abu Dhabi government.

Consolidation has been a growing trend across the Gulf’s banking sector in recent years:
• Qatari Islamic lender Barwa Bank announced last week that it was to merge with International Bank of Qatar, creating a lender with total assets of around $22 billion, giving it a 6 percent share of the market. (Read more here).
• The merger last year of First Gulf Bank and National Bank of Abu Dhabi, to create First Abu Dhabi Bank, a lender with a total assets of $175 billion.
• The chairman of Kuwait Finance House said in July its potential tie-up with Bahrain's Ahli United Bank will need to overcome three rounds of hurdles if a deal is to be ironed out. (Read more here).
• Saudi Arabia British Bank (which is part owned by HSBC Holdings) said in May it had agreed a $5 billion merger with Alawwal Bank (in which Royal Bank of Scotland holds a substantial stake), a deal which marks the first major banking tie-up in the kingdom in two decades.
• Bank Dhofar and the National Bank of Oman announced in late July they were in merger talks. (Read more here).
• However, some potential tie-ups have floundered after long negotiations. Talks regarding a three-way tie-up between Qatari lenders Barwa Bank, International Bank of Qatar and Islamic lender Masraf Al Rayan ended in June following 18 months of negotiations.
• Bank Dhofar also attempted a merger with Oman's fourth-biggest bank, Bank Sohar, but the two firms called off talks two years ago following three years of talks after failing to agree terms.

The merger talks come as a new report by professional services firm Alvarez & Marsal (A&M) found UAE banks’ profitability continued to increase during the second quarter of 2018.

The UAE Banking Pulse for Q2 2018 report looked at Q2 data for the emirates’ ten largest listed banks and compared the results to the previous quarter. (Read the full report here).

The report's key findings were as follows:
• Deposits grew faster than loans and advances, increasing by 2.18 percent and 1.75 percent, respectively.
• Operating income showed a dramatic turnaround, growing by 2.25 percent in Q2, compared to a 1.37 percent decline in Q1. The report said this was driven by an increase in interest income.
• Seven of the top banks reported an increase in net interest margin (NIM) – a measure of the difference between interest income and interest paid out to other lenders or deposit account holders – while NIM increased overall by 2.61 percent in Q2, compared to 2.55 percent in Q1.
• Despite growing operating income, costs also rose, especially among sales and general administrative sectors.
• Banks’ have continued to reduce their loan loss provision, meaning their combined cost of risk fell slightly from 0.81 percent in Q1 to 0.78 percent in Q2.
• Seven of the banks reported an increase in return on equity (ROE), as cost of risk decreased and operating income increased.

The ten banks included in the analysis included First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Union National Bank, Commercial Bank of Dubai, National Bank of Ras Al-Khaimah and the National Bank of Fujairah. (Read the full UAE Banking Pulse for Q2 2018 report here).

Further reading:
• Abu Dhabi Commercial Bank says in merger talks with two rivals 
• Barwa, IBQ bank merger good for Qatar market analysts say
• Bank_Dhofar, NBO tie-up could create lender with $20 billion asset base 
• Money in the bank: UAE's big four lenders set to maintain profits, says Moodys 
• Better business: Bank profits improve as fewer loans are written off
• MENA investment banking fees down for the third year in a row
• Alvarez & Marsals latest UAE banking pulse report shows continued growth in Q2 2018

(Writing by Shane McGinley; Editing by Michael Fahy)
(shane.mcginley@thomsonreuters.com)

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