UAE three-way bank merger is credit-positive: Moody’s

The potential merger between Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB), and Al Hilal Bank (AHB) will be credit-positive for the UAE’s banking system, Moody’s Investors Service said in a report on Monday.

The merger “would contribute to consolidation of the over-banked UAE banking sector, which will increase banks’ pricing power, reduce pressure on their funding cost and increase their ability to meet sizeable investments,” Moody’s said.

Last week, ADCB confirmed in a statement to the Abu Dhabi bourse that it was in early merger talks with the two other lenders, noting that “both sets of discussions are currently at a very preliminary stage.”

With 60 banks in the UAE serving a population of only 9 million, competition in the sector has intensified in recent years, as lending opportunities decreased following a slump in economic and credit growth amid lower oil prices.

Tougher competition also reflects a focus on “high-quality borrowers,” given a high level of delinquencies among small and medium companies and mid-sized corporates amid a soft environment, along with the introduction of a credit bureau, Moody’s said.

Accordingly, banking sector consolidation will ease pressure for funding and increase banks’ scale and revenue base. This, in turn, will improve their ability to meet sizeable investments related to compliance, digitalization and new accounting standards like IFRS9.

Historically, carrying out bank mergers in the GCC has been challenging due to high pricing expectations from shareholders and the healthy profitability of banks in the region.

However, subdued economic growth is gradually driving consolidation in the over-banked region.

In the UAE, First Gulf Bank and National Bank of Abu Dhabi merged to create First Abu Dhabi Bank in April last year.

Meanwhile, ADCB, UNB and AHB have some common shareholding, with Abu Dhabi Investment Council holding stakes of 63 percent in ADCB, 50 percent in UNB and 100 percent in AHB.

“We estimate that the combined entity would have assets of around $113 billion, closer to the dominant First Abu Dhabi Bank, which had $188 billion of assets as of June 2018, and Emirates NBD PJSC with $130 billion of assets as of June 2018,” Moody’s said.

Based on assets, First Abu Dhabi Bank had a 26 percent market share in the UAE and Emirates NBD had 18 percent as of June 2018.