Outlook: More GCC banks likely to consolidate amid tight economy, flat oil prices

More banks in the Gulf Cooperation Council (GCC) region are likely to consolidate amid challenging economic conditions and low oil prices, a top UAE bank official hinted on Wednesday.

The mergers and acquisition space in the region have seen increased levels of activity in recent years, with lenders scaling down to remain competitive in a tight business environment.

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Prior to the coronavirus pandemic, growth in economies like the UAE – which has been suffering a real estate downturn – was already quite sluggish and certain markets were overbanked.

“The ongoing consolidation of the banking sector in the GCC region is expected to continue with constrained growth opportunities and lower oil prices,” said Mohammed Ibrahim Al Shaibani, chairman of Dubai Islamic Bank (DIB).

The UAE-based lender acquired its competitor Noor Bank in a transaction structured through a share swap in January this year, shortly before the global coronavirus lockdown. The acquisition involves integrating Noor’s operations into DIB’s.

In a statement to the Dubai Financial Market (DFM) on Wednesday, Al Shaibani said the “strategic acquisition remains on target for completion by year end”.

“The anticipated synergies have already started to materialise which will pave the way for robust growth and greater returns for shareholders in the years to come.”

Late last year, Kuwait Finance House announced plans to acquire Bahrain’s Ahli United Bank, also through a share swap transaction. The acquisition process, however, has been moved to December this year due to the disruptions caused by the COVID-19 pandemic.

“The banks now face larger cost adjustments as low oil prices and the coronavirus fallout constrain growth opportunities and severely dent their profitability,” Badis Shubailat, Analyst at Moody’s said in a report. “This is prompting a new wave of mergers as banks seek ways to combat revenue pressure,” he added.

Dubai Islamic Bank’s performance

From January to September, DIB’s assets jumped 29 percent to 300 billion UAE dirhams ($1.1 billion), while total income went up by 19 percent to 9.9 billion dirhams. Its net profit as of September 2020 also reached 3.124 billion.

Al Shaibani said the global environment remains uncertain, with economies around the world yet to fully recover. However, he pointed out that the UAE remains committed towards economic development, and that trade and business services have gradually recovered.

“The proactive fiscal policies of the UAE government have supported the domestic banks to continue to operate profitably while simultaneously assisting and servicing customers during these trying times,” said Al Shaibani.

Reporting by Cleofe Maceda