The merger of equals: What’s next for UAE banks?

The merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) is set to change the banking landscape in UAE and the Middle East. The combined entity is expected to become the largest bank by assets in the region, with the financial strength and expertise to drive UAE’s economic growth.

First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD), both headquartered and listed in Abu Dhabi, are among the leading banks in the UAE. NBAD is UAE’s largest bank by the end of 2015, with assets worth AED407 billion ($110.8 billion) and over 100 branches. FGB, on the other hand, is the fourth largest bank with assets worth AED227 billion ($61.8 billion), with over 80 branches. The government of Abu Dhabi controls 70% of NBAD through the Abu Dhabi Investment Council, and FGB is directly controlled by members of Abu Dhabi’s royal family.

Merging the operations of the two banks aims to achieve cost synergy and reduce the effects of low oil prices, which has resulted to lower liquidity in the banking sector and a slowdown in UAE’s economic growth. The resultant bank will also be better equipped to serve the diverse needs of the customer base at greater cost efficiency in both home market and abroad. The merger will likely increase the competition in the banking industry, directly impacting loan pricing and enhancing credit growth. Under such circumstances, the survival of small scale banks will become more challenging in a relatively overbanked market like the UAE.

The deal has been described as a worthwhile one with cost and revenue synergy gains between FGB and NBAD becoming more apparent at savings worth AED500 million ($136 million) per year. The consolidation of the two banks will result in a combined asset value of AED642 billion ($175 billion). This merger of equals, which will combine FGB’s high return on equity (ROE) and lower cost of funding in NBAD, will most possibly develop a ‘mega-bank’ in Abu Dhabi – a move that will encourage the growth of the emirate as the region’s major financial centre. However, in the absence of flexible planning and watchful execution, the merger could result in failure.

The consensus view has been in favour of the merger, which is the largest of its kind in the Middle East since the consolidation of Emirates Bank International and National Bank of Dubai in 2007. The creation of Emirates NBD met the regional and international expansion goal of combining the wholesale, retail, investment, treasury, and Islamic banking businesses of the two large banks. The outcome is a banking powerhouse with the highest asset value in the UAE as well as an enhanced distribution network of branches and ATMs.

If the merger of FGB-NBAD follows this, the resultant NBAD entity will combine the market-leading consumer banking business and strong credit card offerings of FGB with the robust international connectivity, customer-driven wholesale banking, and capital markets advisory of NBAD. This will create a well-balanced bank that can support the development of UAE’s private and public sectors. By combining the technological and product innovations of the two banks, FGB-NBAD’s merger seeks to enhance its role as a supra-regional bank.