Thursday 18, May 2017 by Nabilah Annuar

M&A across the GCC financial sector is passive, but deal value remains stable

In spite of conducive market conditions and rumoured potential deals, a surge in mergers and acquisition (M&A) among banks in Gulf Cooperation Council (GCC) countries is unlikely.


Due to structural impediments, Fitch Ratings has suggested that M&As will be limited to those that create leading domestic market players or allow shareholders to realise value immediately upon the inception of the merger.


Banks across the region are undeniably facing pressure on profitability and tighter liquidity, particularly in countries where public sector deposits have been withdrawn from banks to shore up government finances weakened by lower oil prices. According to Fitch, UAE (which has about 50 banks), Bahrain and Oman would benefit from consolidation as many banks in these countries lack sufficient scale.


While these conditions may increase motivation for M&As and some banks are discussing potential deals, Fitch points out that shareholder appetite will be limited, given the banks' sustained solid profitability and the prevalence of large private local shareholders in some GCC countries. Some countries have only a small number of local banks, which limits competition. This means that profitability, although down, has remained solid despite the macroeconomic pressures and is therefore less likely to be a driver for M&A. Saudi Arabia only has 12 local banks; Qatar and Kuwait each have only 11.

The ownership structure of GCC banks is also seen as a stumbling block to M&A approvals—well established local private shareholders often control sizeable stakes and foreign banks only hold minority stakes. Cost savings are often put forward to support deals but these are rarely sufficient to convince shareholders, as cost-cutting in the GCC is difficult, and shareholders tend to have shorter-term objectives such as cash realisation.

According to Fitch, M&A deals are much more likely to complete if they create domestic market leaders. Becoming a bigger bank strengthens ties to the government through business flow, and shareholders are also often attracted by stronger resilience of the new entity to credit or liquidity risk. An example of this is First Abu Dhabi Bank, a recently merged entity between National Bank of Abu Dhabi and First Gulf Bank.

Similar trends are also seen in other GCC countries such as the potential amalgamation between Saudi British Bank and Alawwal Bank which would create the third-largest bank in Saudi Arabia. In Qatar, Masraf Al Rayan, International Bank of Qatar and Barwa Bank are in the due diligence phase of a planned three-way merger that would create the largest Islamic bank in the country.

M&A deals are also much more feasible if they allow shareholders to realise value on the day of the merger. Fitch opined that the Saudi deal would potentially allow RBS to divest from its stake in Alawwal if Saudi British Bank were to buy out RBS, or at least make it easier for RBS to do so, with a smaller stake in a larger entity. RBS's stake in Alawwal is reported to have been for sale for a number of years. Similarly, the Qatari deal would probably result in short-term gains for some large individual shareholders. In many cases common shareholdings between banks also makes a merger more likely, such as in the Saudi deal.

Although M&A activity may be slow on the financial front in the GCC, overall deal value in the MENA region remains stable, supported by Saudi Aramco’s 50 per cent acquisition of Petronas’ RAPID project. Q1 of 2017 recorded a total of $18.2 billion in deal value, compared to $18.4 billion in the corresponding period last year.

According to statistics from EY, the number of M&A deals in MENA declined in the Q1 this year recording 84 deals, compared to 115 deals in the same period in 2016. The outbound announced deal value increased substantially by 636 per cent from $1.3 billion in 2016 to $9.3 billion in Q1 2017. Announced inbound deal value also rose exponentially from $0.5 billion in Q1 2016 to $5.7 billion in this year. On the other hand, announced deal activity value for domestic transactions witnessed a significant decrease of 81 per cent in Q1 2017 compared with Q1 2016.


In the region, Saudi Aramco’s acquisition of a 50 per cent stake in Malaysian state-owned energy company Petronas’ RAPID project for $7 billion was the largest deal of the quarter. The biggest technology deal of the quarter was the acquisition of Souq.com by Amazon for approximately $650 million, marking Amazon’s first move into serving the Middle East region.


MENA executives are feeling more optimistic that economic conditions are right to return to deal making. As oil prices continue to stabilise and Government initiatives foster greater economic certainty, the M&A pipeline has never been better—both quality and quantity. The recent reversal of certain austerity measures in the GCC are also expected to result in more confidence in deal making.


The latest EY Capital Confidence Barometer found that executives in the region are feeling more positive about the global economy, with 47 per cent expecting deal activity to increase in the next 12 months. 41 per cent indicate they have five or more deals in the pipeline, with 54 per cent of MENA companies looking to close deals over the next year. They however expect a slowdown in global trade flows and an increase in protectionism, high fluctuation in currencies and capital markets, and increasing geopolitical uncertainty as significant economic risks.  Market fluctuation and lower oil prices have 54 per cent of MENA executives looking at organic opportunities first to meet growth objectives.