Financial consolidation continues in Abu Dhabi with three-way merger

Financial consolidation continues in Abu Dhabi with three-way merger

The proposed merger of Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Al-Hilal is the latest in a series of financial sector mergers in Abu Dhabi.

National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) completed their merger during the first quarter of 2018, forming First Abu Dhabi Bank. At the same time as they were working on that merger, the Abu Dhabi authorities merged two of their investment funds, International Petroleum Investment Corporation and Mubadala Development Company, with the new entity retaining the Mubadala name. Then, in early 2018, a third firm, Abu Dhabi Invesment Council, was merged into to Mubadala. 

The proposed three-way combination of ADCB, UNB and Al-Hilal will be effected through ADCB issusing shares to UNB, followed by a takeover of Al-Hilal. Al-Hilal is currently an Islamic bank and it will remain so, as a separate legal entity, albeit consolidated onto the books of the new ADCB. The current chairman and the current Chief Executive of ADCB are expected to become the Chairman and the CEO of the merged entity.

At the end of 2017, ADCB had equity of $32.4bn, UNB had equity of $19.5bn and Al-Hilal had equity of $5.5bn.

The bank mergers will reduce the number of Abu Dhabi based local commercial banks to four from seven. The two other Abu Dhabi based banks are Abu Dhabi Islamic Bank and Arab Bank for Investment and Foreign Trade (which trades as Al-Masraf.) Al-Masraf is owned by the Emirates Investment Authority and Libyan Foreign Bank (42.3% each) and Banque Exterieure d'Algerie (15.4%).

There are five locally incorporated commercial banks in Dubai (excluding those that are wholly owned subsidiaries of another), four in Sharjah (prior to the rescue of Investbank earlier this year), and one in each of the other four emirates. There are many more foreign owned banks but these tend to be much smaller than the local banks. 

Looking beyond bank mergers in Abu Dhabi, local oberservers have been expecting mergers in the insurance sector. There are nearly 70 insurance companies operating in Abu Dhabi.

The mergers in Abu Dhabi are driven by the desire of the local authorities to consoldiate their holdings - all the banks that are being merged are majority owned by government investment institutions or by individuals close to the government. Nonetheless, they do form part of a wider trend towards bank mergers in the GCC. Saudi British Bank and AlAwwal are finalising their merger in Saudi Arabia; Kuwait Finance House and Bahrain-based Ahli United Bank are in merger talks; and mergers are expected in Qatar. Saudi giants National Commercial Bank and Riyad Bank are even reported to be in merger talks.

There has never been so much cosolidation in GCC banking markets. There were some bank mergers in the UAE in the mid-1980s (resulting in the creation of ADBC, for example) but they were driven in most cases by the desparate isolvency of some of the players following the collapse in oil prices. The low oil prices that prevailed from the second half of 2014 until early 2018 have put pressure on GCC economies, but the current round of bank mergers is more a reflection of sound strategic thinking than of financial or accounting necessity.