The Gulf banking sector has witnessed an increase in mergers and acquisitions (M&A) in recent years, driven in part by the economic headwinds associated with the Covid-19 pandemic. At the outset of the pandemic in the first quarter of 2020, it was anticipated that the economic slowdown and the associated fall in oil prices would accelerate the M&A trend among banks in the region, with most institutions expecting constrained profitability despite having a low pre-crisis risk profile. A report published by ratings agency Standard & Poor’s (S&P) in March 2021 noted that the adverse effects of the 2020 shock were expected to be felt acutely by banks in the UAE, Oman and Bahrain, and less so in Qatar and Saudi Arabia. The report postulated the region could experience a second round of M&A activity when the full economic impact of the pandemic became apparent and many institutions sought to strengthen their resilience against future crises.
In addition to pressure brought on by the pandemic, another factor behind the mergers is the proliferation of banks in the region. A report by credit ratings agency Moody’s in 2020 noted that the move to consolidate was felt acutely by smaller banks that risk being crowded out by larger peers.
Major Deals
Qatar saw significant M&A activity in the immediate aftermath of the outbreak of Covid-19. Islamic bank Masraf Al Rayan announced its merger with Al Khaliji Bank in November 2021. The deal created Qatar’s second-largest lender and one of the region’s largest sharia-compliant groups.
In Saudi Arabia, SABB and Alawwal Bank finalised their merger in March 2021, creating the Kingdom’s third-biggest bank by assets. Even more significant was the establishment of Saudi National Bank in a $15bn agreement. It is the largest financial institution in the country and a major regional player.
The planned acquisition of Bahrain’s Ahli United Bank, its largest financial institution, by Kuwait Finance House was postponed due to the pandemic, and as of mid-2022 no timeline had been announced. If the deal goes ahead, it would create the GCC’s sixth-largest bank, with over $100bn in assets. Significantly, this tie-up would transform Bahrain’s biggest bank into a sharia-compliant institution – a sign of continued potential for growth in the segment.
Future of M&A
With pressure from the pandemic easing, questions remain about whether the M&A trend will continue. An S&P report published in March 2021 argued that 2020 had seen the region’s banks grapple with a “triple shock” to profitability, stemming from “lower lending growth, lower-for-longer interest rates and higher cost of risk”. The report also argued that additional waves of the pandemic could spur increased cross-border M&A, although it noted that this would “require more aggressive moves by management than seen previously”. While the situation improved over the course of 2021, residual effects of the triple shock could still push some banks in the region to enhance their resilience by consolidating with other financial institutions.
An improved business climate, a shift towards economic recovery, significant government stimulus during the initial years of the pandemic and cheaper finance all helped to create a record year for M&A in 2021, with banking consolidation reaching an alltime high in markets around the world. According to a report from financial markets platform Dealogic, global banking M&A activity hit $5.6trn in 2021, up 63% from 2020 and much higher than the previous record of $4.4trn, which was set in 2007.
Consolidation was expected to continue throughout 2022, despite an increase in interest rates and rising inflation. Moreover, a focus on sustainability may generate deal activity going forwards. Indeed, while acknowledging the challenges to M&A growth, a report published by consulting firm KPMG predicted that consolidation would remain strong in 2022 considering the volume of proposals seen towards the end of 2021.
