Economic Update

Published 18 Apr 2019

An ongoing round of mergers and acquisitions (M&A) in Kuwait’s financial services sector is set to create two banking and asset-management powerhouses, with market consolidation having the potential to spur additional tie-ups.

In mid-March Kuwait Finance House (KFH) announced that the due diligence process for its planned buyout of Bahraini lender Ahli United Bank (AUB) is expected to take up to three months to complete. The two institutions agreed to the terms of the sale in January, and once finalised, the merger will create the GCC’s first cross-border bank consolidation.

The buyout, which values AUB at $7bn – 17% above its current market valuation – has been on the cards since mid-last year when the two institutions opened negotiations.

The merger has already been given provisional clearance by regulators, with the Central Bank of Kuwait granting initial approval for the deal in February, according to a disclosure to the stock exchange.

In a report issued in late February, ratings agency Fitch said that the KFH-AUB merger would create one of the largest Islamic banks in the region. It is estimated that the combined assets of the new entity will be around $94bn, which would make it the largest bank in Kuwait and the sixth-largest lender in the GCC.

The acquisition will also increase the reach of the Kuwaiti lender, positioning it in markets such as Egypt and the UK, where AUB already has a profile. KFH said in a statement in January that it expects the merger to have a significant and immediate impact on earnings, and projects a 90% increase in consolidated profits compared to those of 2018.

See also: The Report – Kuwait 2018

An economy-wide shift to consolidation

The KFH-AUB consolidation is not the only large-scale merger in the Kuwaiti financial sector. In March asset management and investment banking firms KAMCO Investment Company and Global Investment House announced that they had agreed to seek regulatory approval for a tie-up, advancing the merger process.

The merger began last September with KAMCO acquiring a 70% majority stake in Global. The two companies are now moving to finalise the consolidation and KAMCO is set to fold Global into its operations.

According to a statement issued in March, the new entity will have $13bn in assets under administration and management, and $21bn in investment banking credentials. Moreover, the merged company will be the largest asset management and investment banking firm in the domestic market, and one of the biggest in the region.

The financial sector mergers reflect a trend in the overall Kuwaiti economy of a consolidation of firms in key sectors. Over the past four years Kuwait has been second only to the UAE in terms of the numbers of M&A, according to a recent report by asset management and investment group Kuwait Financial Centre.

Some 127 closed transactions involving Kuwaiti entities were undertaken between 2014 and 2018, representing 23% of all M&A in the GCC during that period, the report said. The top transactions were in the food and beverage, telecoms, education and technology sectors.

Furthermore, Kuwait accounted for 34% of all regional M&A transactions in the fourth quarter of last year, with the move towards consolidation in the financial sector expected to continue this year.

The number of financial sector mergers in last year’s December quarter was supported by acquisitions with a combined value of $226m. These included the $100m purchase by NBK Capital of a 56% stake in Kuwait’s largest classifieds website 4SALE, and the $66m purchase by Abdul Razzaq Abdul Hameed Al Sane & Sons Group of a 92% stake in the New Technology Bottling Company.

Takeover trend in the GCC

The current M&A trend in Kuwait’s financial sector also mirrors a pattern in the wider region, with a series of bank mergers in Saudi Arabia, Qatar, Oman, Dubai and Abu Dhabi either launched or completed in the past year.

For example, Saudi British Bank and Alawwal Bank finalised a merger in October last year to form the kingdom’s third-largest lender, with $71bn in assets, while Abu Dhabi Commercial Bank’s planned purchases of Union National Bank and Al Hilal Bank will create the third-largest bank in the UAE, with $114bn in assets.

Analysts say these moves towards consolidation in the Gulf’s financial sector have been prompted by tighter market conditions due to lower energy prices and a subsequent fall in credit demand as local economies cool.

The recent round of regional mergers has targeted operational and funding cost reductions, improved profitability, and a reinforcement of asset bases and risk management capacity.

Furthermore, the recent developments are expected to drive other lenders in the region to consider M&A as a way of remaining competitive, according to analysis released by Fitch in late March.

Further consolidation would help larger players protect and potentially expand market share, though this could come at the expense of smaller operators and therefore incentivise additional M&A, Fitch said, encouraging smaller firms to seek out stronger partners or exposing them to a takeover.