With the exception of Saudi Arabia, the banking sector across the GCC is generally fragmented in nature, with a large number of institutions pursuing business within relatively small bankable populations. For decades regulators have extolled the virtues of sector consolidation, in some cases approaching banks discretely to encourage a merger, and in other cases, adjusting regulatory frameworks to make them more amenable.
Financial institutions, however, have proved reluctant to combine their assets with former competitors, often citing complex, frequently family-based ownership structures, which prominent shareholders wished to maintain. After the global financial crisis of 2008, when liquidity grew scarce and double-digit profit growth became harder to attain, the unrealistically high valuations that shareholders placed on their financial institutions emerged as a new block to merger and acquisition (M&A) activity. More recently, many industry observers saw the implementation of Basel III’s capital adequacy and liquidity standards as a potential driver of mergers in the regional banking sector, but this anticipated development has been slow to materialise.
GIANT COMBINATION: In 2017, however, news broke regarding a possible merger of regional significance. In July it was announced that Manama-headquartered Ahli United Bank (AUB) was in talks with Kuwait Finance House (KFH) regarding a merger that would create the sixth-largest bank in the GCC, with assets of nearly $90bn. AUB is Bahrain’s largest lender and has operations in Kuwait, Egypt, Iraq, Oman, Libya and the UK, either directly or through affiliates.
The operations of KFH, meanwhile, are primarily focused in Kuwait and Turkey, and include relatively small operations in Malaysia and Bahrain. The differing geographic footprints of the two institutions might make for a challenging integration process, but both would benefit from increased asset diversity and potential economies of scale. Moreover, as both institutions are sharia compliant, the new entity arising from a merger would also benefit from the anticipated expansion of Islamic assets in the GCC (see IFS).
The prospect of a merger of this scale has raised the question of further consolidation, and events elsewhere in the region have served to heighten speculation in this regard: the past year has seen the creation of First Abu Dhabi Bank, the result of a merger of National Bank of Abu Dhabi and First Gulf Bank, which created the biggest bank in the UAE, and other mergers are under way in Qatar and Saudi Arabia.
REGULATORY ENCOURAGEMENT: Much like other regulators in the region, the Central Bank of Bahrain (CBB) has shown itself to be positively disposed to M&A activity, particularly since the global economic crisis of 2008. In 2009 it introduced a new regulatory framework for takeovers, M&A and share repurchase transactions. Key aspects of the regulations include an obligation to stage a tender offer in certain circumstances, the maintenance of board neutrality and a mandatory squeeze-out rule – all of which are staple aspects of mergers on the international front.
Outside the banking sector, this framework has served a number of important mergers, perhaps most notably the 2016 deal between Gulf Hotels Group and the Bahrain Tourism Company. This action was significant in that it was the first time that competing offers had been made for a Bahraini listed company, and one of the few instances of a squeeze-out of non-adhering partners. While sustained banking sector M&A activity remains elusive, the CBB has continued to voice its support for it. In December 2016, for example, Rasheed Al Maraj, the governor of the CBB, called for Islamic banks to merge their balance sheets to increase their stability and achieve the best scale of operations.
Whether the consolidation events of 2017 herald a new era of merger activity in the Bahraini banking sector remains to be seen, but the regulatory framework is in place to support it, and the supervisory body is likely to view any development in this direction favourably.
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