15 minute read
Shifting Sands: M&A in the Middle East
The GCC banking sector has weathered several storms over recent years. From a plunge in oil prices in 2014 that forced governments to calibrate budgets and dip into state deposits to problem loans owing to the property and retail slump, GCC banks have been merging to remain profitable and maintain a competitive edge.
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A year into the COVID-19 pandemic crisis, 2021 kicked off with a wave of deal-making some of which have been in the making for some time as banks positions themselves for improved economic conditions post-pandemic amid vaccine optimism.
S&P Global expects banks’ financial profiles to worsen across many jurisdictions until the economic recovery takes hold, but the rating agency said that “a widely available vaccine from mid-2021” and a strong economic rebound this year might turn the tide.
It is also worth noting that growth in GCC banking assets is linked to regional GDP, which moves largely in tandem with oil prices. Gulf states are still reliant on oil which accounts for three-quarters of the six-nation bloc’s spending. Although oil prices are recovering, the instability associated with oil prices – which plunged into negative territory last April, production curbs, and tighter financial conditions pose a challenge for the region’s banking sector.
“In today’s era of significant economic change, companies continue to look for partners that can leverage their abilities for cross-selling, accessing new markets and customers and other synergies to enhance financial performance and gain competitive advantage, boosting the combined market share,” said KPMG.
Deals on the cards
“ Merger and acquisition (M&A) activity has always been a leading indicator
in terms of economic recovery, and we have already started to see an uptake in this and expect the trend to continue over the coming year,” said Pietro Castronovo, Managing Director at Alvarez & Marsal.
Last October, Saudi Arabia’s National Commercial Bank (NCB) and Samba Financial Group (Samba) agreed to merge into a banking behemoth with $223 billion in assets and is expected to put the merged entity, that will be called Saudi National Bank, on equal footing with regional rivals Qatar National Bank and First Abu Dhabi Bank.
The consolidating bank, NCB, agreed to pay $7.58 for each Samba share and upon the completion of the merger, NCB shareholders will own 67.4% and Samba’s shareholders will own 32.6% of Saudi National Bank. The shareholders of the two banks approved the historic tie-up in March and the deal is expected to be closed on April 1, 2021.
Fitch expects the merger to benefit Saudi National Bank’s company profile underpinned by an expected combined market share in domestic assets of around 25% as well as a strengthening and further diversification of the business model.
The Saudi British Bank (SABB) also completed its takeover of Alawwal Bank in March, creating the third-largest lender in the kingdom with total assets of $73.7 billion after the two lenders legally merged in June 2019.
The call by the Bank of Lebanon, the central bank, for local lenders to recapitalize by the first quarter of 2021 and repatriate part of deposits transferred overseas as the country tries to rescue its economy which is in freefall, has seen local lenders including Bank Audi and Blom Bank putting their Egyptian portfolios up for grabs.
Earlier this year, UAE’s First Abu Dhabi Bank (FAB) agreed to acquire the Egyptian arm of Lebanon’s Bank Audi in a deal that is expected to make the Abu Dhabi-based bank one of the biggest foreign financial institutions in Egypt.
The deal, which is going to be FAB’s first international acquisition and is expected to be closed within the next few months, comes after the two lenders suspended merger talks last May due to the “difficult market conditions” amid the impact of the pandemic on the economy.
Similarly, Bahrain’s Arab Banking Corporation (Bank ABC) also agreed to acquire the Egyptian business of
Lebanon’s Blom Bank in a deal valued at $427 million. The takeover, which is subject to regulatory approvals in Bahrain, Egypt and Lebanon, is scheduled to close in the second quarter of 2021.
Qatari lenders, Masraf Al Rayan and Al Khalij Commercial Bank agreed to a share-swap merger deal in January, a tie-up that is projected to create the country’s second-largest bank with an asset base of around $45 billion. The tie-up will also create one of the largest Shari’ah-compliant banks in the Gulf region. Al Rayan and Al Khalij started merger talks in June 2020 and the deal is scheduled to close during the first half of this year subject to regulatory approvals.
However, the pandemic also slammed the brakes on one of the region’s most anticipated mergers. There are no new updates on the region’s only cross-border tie-up between Kuwait Finance House and Bahrain’s Ahli United Bank which was announced in early 2019 but was shelved after the outbreak of COVID-19.
The driving forces overbanked
Moody’s said that bank merger and acquisitions in the GCC region have so far largely involved common shareholders – normally the government and related entities – reorganizing bank assets under
a single entity in a bid to achieve a leaner cost structure and increase profits in a highly competitive and overcrowded banking market.
The merger between NCB and Samba involves a common shareholder, the Saudi government, which holds 44.29% shareholding in NCB and a 22.91% stake in Samba through the kingdom’s sovereign wealth fund. The Qatari government is also the ultimate shareholder in Al Rayan and Al Khalij – the country’s fourth and sixth largest banks – through the Qatar Investment Authority and other state-owned entities with stakes of 49% and 47% respectively, according to Moody’s.
According to a Bloomberg report, Qatar has 2.5 million people being served by about 20 local and international banks, leaving smaller lenders at a disadvantage unless they can find a niche or competitive edge.
M&A ACTIVITY HAS ALWAYS BEEN A LEADING INDICATOR IN TERMS OF ECONOMIC RECOVERY, AND WE HAVE ALREADY STARTED TO SEE AN UPTAKE IN THIS AND WE EXPECT THE TREND TO CONTINUE OVER THE COMING YEAR.
Pietro Castronovo, Managing Director at Alvarez & Marsal
“The financial services sector is fundamentally a scale business. In the near future, we expect further consolidation both in the banking, insurance and asset management sectors,” said Castronovo.
The GCC region banking system is reportedly highly fragmented making competition intense, and the situation is expected to be intensified by a shrinking population in some countries as expatriates depart for their countries amid massive job losses. As of 2019, the region had more than 160 banks serving a regional population of 58 million compared with a dozen commercial banks in the UK catering for a population of 66 million.
Sluggish growth
The dual shocks of COVID-19 and prolonged low oil prices is taking its toll across the six-nation bloc GCC region and all the countries are projected to record significant contractions, with a plunge in real non-oil GDP expected to range between -3.5% and -6%.
Alvarez & Marsal’s Castronovo said ‘In the short term, COVID-19 has significantly impacted the volume of the transactions, however, it is our strong belief that in the medium term there will be a further push in consolidation across the main sectors including financial services, technology, healthcare, education, and energy / heavy industries.”
“The revenue shock will shift management attention to cost discipline and consolidation opportunities as main sources of bottom-line uplift,” said Moody’s.
GCC banks are also battling with problem loans owing to the property and retail slump. The collapse of real estate majors such as Drake & Scull International and Arabtec in the UAE and the Binladin Group in Saudi Arabia is reportedly expected to put a strain on regional banks who have exposure to these entities.
“Given the current circumstances as well as the coming global financial condition, we can build a case for two or more Islamic banks or financial entities to merge and form a more robust Shari’ah compliant financial institution as was seen in the merger of Al Salam Bank Bahrain’s merger with BMI a few years back,” said Mujtaba Khalid, Head of the Islamic Finance Centre, Bahrain Institute of Banking & Finance.
S&P Global stated that a supply glut exacerbated by coronavirus has built up even as demand faltered, feeding what the rating agency called the market’s long decline that has seen prices and rents drop by more than a third since peaking in 2014.
$223 billion
assets of Saudi National Bank
Source: National Commercial Bank
Ray of hope
Meanwhile, the situation might be different in Saudi Arabia where banks are set to make a windfall from the structural reforms and Crown Prince Mohammed bin Salman’s Vision 2030, a grand vision to diversify the economy away from dependence on hydrocarbons. The kingdom is urging tie-ups in the banking sector as it vies to become the region’s financial hub and to create stronger entities that can support growth in its private sector
Saudi Arabia’s Vision Realisation Programmes that underpin Vision 2030 are moving from design to implementation. The kingdom’s economic transformation plan is being backed by government spending on large infrastructure projects that are expected to boost growth in the country’s non-oil economy.
The Saudi wealth fund, Public Investment Fund (PIF), plans to double its AUM to $1.07 trillion by 2025 as well as boost the local economy by investing $40 billion annually. PIF is also financing several mega-developments including the $500 billion NEOM City, Qiddiya and the Red Sea Development Company’s mega tourism projects.
M&A 2021
The pandemic has created perfect conditions for M&A activity across the Gulf region and Bain & Company sees the following trends shaping deal-making in 2021:
• A surge in domestic consolidation
– rising operating costs and regulatory support will spur domestic consolidation that will give rise to local champions for example the merger between Saudi Arabia’s NCB and Samba.
• More divestiture of non-core
businesses – as operating costs increase and scale becomes increasingly important to stay competitive, banks will continue to divest businesses and operations that are noncore for example the takeover of Blom Bank’s Egyptian business by Bank ABC.
• Scope deals will deliver needed
capabilities or technologies – with some fintechs facing the risk of funding shortages and sellers willing to take advantage of rising high-tech multiples, banks will seize the opportunity to acquire new capabilities or technologies that help them adapt their businesses for a digital future that has been hastened by COVID-19.
• Cross-border deals might become
a reality – cross-border deals have been in discussion for years but have not yet fully materialized in a banking industry that remains mostly local.
The merger between KFH and AUB is expected to be the first cross-border merger in the GCC, however, the deal is yet to materialize.
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Coming together
Pietro Castronovo, Managing Director, Alvarez & Marsal’s Strategy and Performance Improvement
Pietro Castronovo, Managing Director with Alvarez & Marsal’s Strategy and Performance Improvement practice in Dubai expects to see a push in consolidation across key market sectors with the bulk of activity staying domestic in the near term, though with geo-political relations improving and given a supportive regulatory landscape, cross-border deals could grow
Deal volumes decreased worldwide in 2020, but the Middle East, and Africa ended the year relatively better, with deal value declines of 4% and 6%, respectively (Bain & Co. global M&A report, 2021). Do you expect regional M&A deal volumes to recover in the coming twelve months?
In the short term, Covid-19 has significantly impacted the volume of the transactions, however, it is our strong belief that in the medium term there will be
a further push in consolidation across the main sectors including financial services, technology, healthcare, education, and energy / heavy industries.
M&A activity has always been a leading indicator in terms of economic recovery, and we have already started to see an uptake in this and expect that this will continue over the coming year. There are a lot of investors in the region and liquidity waiting to be used. These investors have learned over the last few cycles that it is better to invest now when the evaluations are more affordable and financially attractive. The market uncertainty drives prices down and that attracts investors and certainly draws distress investors.
How do you see the regional financial services sector benefiting from the coming deal making?
The financial services sector is fundamentally a scale business. In the near future, we expect further consolidation both in the banking, insurance and asset management sectors. This will lead to a more resilient and stable financial services industry; significantly benefitting the final customers.
On the other hand, we also expect the Fintech sector to continue to flourish. Across the region, we have witnessed several initiatives by the governments to support early-stage investors and young companies that are preparing for IPO’s. This will eventually boost M&A activities in the region.
Do you foresee a growing trend for cross-border M&A or will the bulk of the action remain domestic?
Despite the recent opening to foreign investments, it is expected that over the next 12 months, the bulk of the M&A activity will mainly stay domestic. However, this trend could change in the next 2-3 years if the regulations continue to evolve and support further crossborder activity.
Moreover, as the relationships between UAE and Israel are normalizing, and as the rift between the GCC countries and Qatar comes to an end; it is expected that this will also positively influence the deal flow in the region.
How much of the coming M&A activity do you think can be directly attributed to circumstances brought about by the Covid-19 pandemic?
The Covid-19 pandemic has added unprecedented risk, complexity, and uncertainty to M&A execution. It has heavily impacted the type of businesses that were not able to transform quickly and adapt to the digital environment, which created low business optimism and confidence. However, the generosity of the government support and subsidies during these times led to the number of distressed M&A opportunities being lower than expected in the region. In our view, the deal activity has largely focused on defensive strategies such as asset sales versus lender-forced transactions. Once the government support reduces or fades, we expect much more distressed deals to take place in the future.
How much M&A action will the regional banking and financial services sectors experience in the coming years?
In the recent years we have seen an increased consolidation in the banking sector in the GCC. For instance, in 2017, the merger of National Bank of Abu Dhabi and First Gulf bank to form UAE’s largest bank – First Abu Dhabi Bank; and more recently, the agreement of National Commercial Bank and Samba Financial Group to merge to create the Kingdom’s largest bank.
Broadly speaking, even globally there is a trend towards larger banks, due to the cost of compliance, the cost of investing in technology and the investment that is going to be required for banks to maintain an operating model which can compete with the neo-banks and which can compete with the challenger banks. Furthermore, as referenced in our Q4 2020 issue of UAE Banking Pulse, the recent FAB’s acquisition of Bank Audi Egypt reinstated the M&A wave in the region and other banks could follow the trend to consolidate their position.
Having said that, we expect this to continue in the coming years and lead to an increased M&A activity in the region given the GCC market is still fragmented considering the size of the economy. Moreover, further consolidation is in the customers’ interest and will surely enhance financial stability in the region.
