Gulf banks consolidator trigger about to be pressed

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News that two of the leading Omani banks are holding merger talks has reignited speculation that a long-expected wave of mergers among the Gulf banks may finally be about to take place.

On 31 July, Bank Dhofar and National Bank of Oman said that they were starting to hold discussions about a merger that would create a bank with assets of just under US$20bn. While much negotiation will be needed before any deal is agreed, investors’ initial reaction has been that the deal makes strategic sense and that, as in much of the rest of the region, Oman has more banks than its approximately 4.5m population needs.

Bank Dhofar held merger talks with another Omani bank Bank Sohar in 2016, but the negotiations ended without agreement, and expectations that this would prove a catalyst for further mergers have since been disappointed, with the notable exception of National Bank of Abu Dhabi’s merger with First Gulf Bank last year. However, in Oman and elsewhere in the region, there have been signs of renewed interest in deals.

Oman Arab Bank and Alizz Islamic Bank have been holding talks about a possible merger for the last two months. Elsewhere, Kuwait Finance House has made an overture to Ahli United Bank in Abu Dhabi about a deal that would create an institution with assets of nearly US$100bn of assets, a year after an earlier attempt at a merger fell through. If created, the bank would be a leader in Islamic finance and the sixth largest bank in the region.

Investors have long pointed to the fact that the Gulf has an unusually high concentration of banks per head of population as a reason for consolidation. The United Arab Emirates has 46 banks to serve only 11m people, and Bahrain has more than 100 banks for a population of little more than 1m. Added to that is a sense that the economic and regulatory regime also increasingly require a strategic response. Volatility in the oil price has put pressure on many banks in recent years. Meanwhile compliance costs are on the rise across the region and, as elsewhere, the need to invest in expensive technology strongly suggests that some of the smaller banks will increasingly struggle to compete.

Yet others warn further patience may be needed, in particular because the attitude of government to the sector. Government has a much more “hands-on” attitude than in Western markets, and many say that it is more interested in orderly markets and corporate harmony than in maximising profitability. They also point to the fact that negligible levels of taxation means that returns on capital are higher than they otherwise would be, and that the number of banks in obvious distress remains low.

So a gradual increase in deals does seem likely, but perhaps the long-awaited deal spree will have to wait rather longer.

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