Mirroring a trend seen across the Gulf, two Qatari lenders announced the country’s first bank merger in 2019. In April of that year Barwa Bank and International Bank of Qatar (IBQ) announced the finalisation of negotiations and clearance of regulatory requirements necessary to consolidate operations. The merged entity, which operates as Barwa Bank, has total assets worth approximately QR80bn ($22bn) and a shareholder equity base of over QR12bn ($3.3bn). Notably, the merger resulted in the consolidation of an Islamic bank – Barwa Bank – with conventional lender IBQ, with the new institution offering sharia-compliant services.
The agreement is a significant step forward for Qatar’s banking industry, according to Sheikh Mohammed bin Hamad bin Jassim Al Thani, chairman and managing director of Barwa Bank. “This merger… is a milestone for the local banking sector, regional mergers and acquisitions (M&A) landscape, and the sharia-compliant banking industry,” he said when announcing the finalisation of the deal. The merger resulted in the creation of the third-largest Islamic bank and the sixth-largest bank in Qatar, with the consolidated lender having a 6% share of the market. The new bank, which is also the ninth-largest sharia-compliant lender in the GCC, is set to benefit from lower funding costs and thus improved profitability.
Changing Market Dynamics
At the same time, Qatar’s banking sector has been undergoing broader changes, including a shift towards digital banking, which is likely to lead to a reduction in branches and physical presence in the coming years. These changes will impact all aspects of the industry, from retail and private banking, to investment and international banking, according to Raghavan Seetharaman, CEO of Doha Bank, and could encourage further consolidation in the sector in the years ahead.
“Consolidation is a game-changer in the market,” Seetharaman told OBG. “Globalisation and new cost structures, as well as digitalisation and consumerism, are pushing banks to redefine the business model in order to address pressures and sustain growth.”
While M&A and the subsequent integration of infrastructure will create new opportunities and entities with increased capital, it is important to ensure that shareholders remain satisfied and margins stay healthy, he added. These changes will be imperative to creating a well-capitalised and resilient sector, especially in the aftermath of the mid-2017 blockade imposed by Qatar’s regional neighbours.
Ratings agency Standard and Poor’s (S&P) forecasts a deterioration in asset quality and an increase in credit losses due to fallout from the continuing blockade, but anticipates the impact on the sector to be manageable.“Qatari banks’ strong capital generation and funding profiles, backed by public sector deposits, should further support the banking system,” S&P said in its May 11, 2019 assessment of the Qatari economy, projecting weaker asset metrics would recover in 2020. S&P also noted that investments related to infrastructure development would help cushion any negative impact on the economy. This particularly applies to larger banks, such as the one created through the merger, which could have greater capacity for project finance.
Mergers are being utilised throughout the Gulf to shrink operational and funding costs, improve profitability, and reinforce asset bases and risk-management capacity amid tighter market conditions. Across the region, consolidation is also strengthening efforts to reduce vulnerability to unpredictable oil prices and shift from economies dependent on hydrocarbons to knowledge-based markets driven by the private sector. The Barwa Bank merger is in line with the country’s blueprint for socio-economic development, Vision 2030, which aims to enhance economic stability with low inflation, sound policy and an efficient financial system.