• Disparate ownership means further consolidation will be slow If the merger between NBAD and FGB goes through, it will create a new benchmark for the size of banks in the UAE. While scale is good, we believe there is a more pressing need for small banks to merge as the market is quite crowded (23 local + 26 foreign banks) and fragmented. We believe the NBAD-FGB merger is likely to incentivise smaller banks to merge in order to remain competitive. However in the ST, we do not expect a rush of M&A activity given a limited number of willing participants. While the strategic fit is important, we believe share ownership will be the key deciding factor as to whether there will be more mergers. Moreover, certain banks would be averse to becoming a junior partner in a merger or open to a cross-emirate M&A. History suggests, that M&A activity in the UAE banking space is not contagious. If the NBAD-FGB merger goes through it will be the first major bank merger since the formation of Emirates NBD in 2007.
• Discounted valuation and lack of scale makes UNB a prime target ADCB and UNB are the obvious merger candidates, in our view. Both are conventional banks and have common ownership as in the Abu Dhabi Investment Council (ADIC) owns more than 50% in the two banks. In addition UNB’s valuation is undemanding (2016 P/BV of 0.7x), its performance has been sub-optimal, and there is scope for revenue synergies (primarily from improved cost of funds) and cost synergies (cost to income: ADCB 35%; UNB: 28%). UNB as a stand-alone entity lacks the scale – loan and deposit market share of 5% – to compete effectively against the large players. One objector to this potential deal could be Dubai-based ICD (a 10% shareholder in UNB), as it may be unwilling to see its stake diluted in a larger bank.
• Merger between smaller UAE banks would be problematic ADIB is stretched in terms of capitalisation (CET1: 9%), its strengths are an impressive retail franchise, liquid balance sheet (LDR: 82 %), a CASA-oriented deposit base and presence in Egypt (ADIB Egypt has 70 branches). However, as ADIB is an Islamic bank, any potential suitor would have to be another Islamic bank and more importantly Abu Dhabi based. So a merger with privately held Al Hilal bank could be a possibility. The retail focused RAKB – 2% loan market share - would be a good fit for a corporate bank such as ADCB. However, RAKB is majority owned by the Ras-Al-Khaimah government and the emirate is unlikely to sell down its 40% stake in the bank or be comfortable becoming a junior partner in a merger. Sharjah based United Arab Bank (with its loans skewed towards SME and mid corporate) could potentially be put on sale by its capital stretched key shareholder CBQ, and is likely to have takers in Dubai and Abu Dhabi.

Shabbir Malik
Murad Ansari