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Advantages of mergers outweigh disadvantages

 

Al Mazaya Report: Future banking mergers in the offing to fulfil development ambitions

 

Mergers ensure more competitiveness, efficient financing tools

It goes without saying that there is now an urgent need to structure a paradigm shift across the business models adopted by the region in order to ensure growth and profitability during the current period which is considered the most challenging for a long time at the financial and economic levels. The objective is to adapt to the rapid developments we have been witnessing over the past 10 years until now.

Within this context, Al Mazaya Holding’s weekly real estate report indicates that the current merger plans embraced by a number of banking entities are the talk of the town as they are seen from the perspective of ensuring diversified economies.

It’s noteworthy that mergers are not a novel concept in the region as the Saudi economy recorded the first merger in 1997; the second such operation was witnessed in 1999 and the third merger was done in 2018 between the Saudi British Bank (SABB) and Alawwal Bank. The latest merger will result in a banking entity that will be the third largest among Saudi banks with assets of up to SAR 270 billion.

Al Mazaya Holding’s weekly real estate report affirmed that the merger plans in Saudi Arabia would reflect positively on the economic performance, especially during the current and upcoming periods, where banking entities that can meet the requirements of large-scale investments and development plans are needed, to streamline the provision of banking facilities to fulfil the requirements of mega projects, currently under construction.

It is expected that mergers will continue across primary sectors, especially the petrochemicals, taking into consideration that the Saudi economy still needs more mergers and new banking entities with a world-class performance.

Al Mazaya Holding’s weekly real estate report sees the UAE economy as well diversified, however, it requires a variety of financing tools, a fact which justifies the existence of more than 50 banking entities supporting the local economy at present.

The UAE economy witnessed a merger in 2007, and the second merger was recorded in 2017, creating a banking entity with assets of $178 billion, with a market share of 7% of the UAE banking sector. The momentum is still there, with major banks in the Emirate of Abu Dhabi reported forming a new banking entity with assets amounting to $113 billion, taking into account that ongoing discussions towards this end are still in their early stages. Despite the denial of reports circulated over the past period, three banks are reported to be merged in the Emirate of Sharjah in a move that is expected to maximise the total value of the banking sector as a whole in the country  with a new banking entity with assets of up to $18 billion.

Main business indicators show that merger plans have started in the UAE economy and will not abate, and they will focus on mid-sized investment entities over the coming period.

In  Oman, according to Al Mazaya, the pace of mergers and the search for new merger opportunities has been growing over the recent period. There are serious debates on the merger of a number of banking entities, including Bank Dhofar with the National Bank of Oman, while Alizz Islamic Bank announced that strategic cooperation with Oman Arab Bank could lead to a merger of the two institutions.

Al Mazaya Report underlined the positive impact of these plans on the financial and economic performance of the Sultanate in light of the direct role of the Omani banking sector in enabling the local economy to emerge from the stages of decline to witness a state of recovery and growth on current prices by 8.7% at the end of 2017. This comes at a time the banking sector continues to achieve good growth rates, meeting the financing needs of all economic sectors in line with the economic diversification initiatives being implemented in the Sultanate. The report noted that the credit granted to the private sector, for example, increased by 5.8% and total banking credit rose by 7.3% during the same period.

In addition, a  merger between Kuwait Finance House and Bahrain’s Ahli United Bank is in the offing, which may take two years to materialise- a deal, when finalised, will result in a huge banking entity expanding across the Gulf, Africa, Europe and South Asia. It will in turn enhance the capacity of the new entity to serve the national economy and encourage other banking entities to increase operational efficiency and boost their competitiveness.

It should be noted that due to the observed overlapping of compliance-related laws imposed by local and international regulatory authorities, as well as the direct impact of new technologies, the need for practical solutions and alternatives to reduce costs has become a necessity, particularly for banking entities that are classified as small and medium-sized banks. In the meantime, there are no preconditions for large banking entities to merge with each other. All options are available, applicable and successful.

Given the current and projected level of global financial and economic challenges, there is a growing need for large-scale entities that are able to deal with all developments, said the report.

The weekly real estate report of Al Mazaya Holding spoke about the size of the investment opportunities that banking entities can undertake and finance. The construction and real estate sector will have the largest share of the improvement and development of the financial sector.

There is a large list of projects waiting for adequate funding. Attracting more foreign investment requires a strong banking sector on par with global banking entities.

Al Mazaya pointed out that reducing operating costs is a major goal of the trend towards integration, which, however, carries along with it some challenges related to the loss of many workers in the sector; this in turn will impact the services sectors and consumers in addition to the rental market, especially in light of the slowdown experienced by a number of economies in the region.

However, the report said the future advantages of the trend outweigh the disadvantages and challenges created by the mergers, a fact, which, the report said, may render mergers the main headline of the coming period.