Over the past 20 years of banking growth, the UAE has become a biosphere of financial institutions – local, foreign, specialized, conventional, and sharia-compliant – to a total sector count of 46 banks and a low banking concentration by international standards.
Given that mergers and acquisitions are a staple of international banking progress in developed and developing markets, it is within the ruling global industry trend for economies of scales and ever-larger institutions that banking voices have been looking at the potential and role of mergers in the GCC financial industry. But when Dubai-based Emirates Bank International Group and National Bank of Dubai entered the merger process with a formal announcement this spring, the move provided observers with a few surprising aspects to consider.
In combining their assets, the two banks will become the largest sector force in the UAE and a major regional player, although not the largest GCC bank by market valuation. Emirates Bank International Group (EBI) and National Bank of Dubai (NBD) had a combined market cap of $11.4 billion at the end of 2006, but no obvious operational advantage that would jump out at first glance. EBI had revenues of $936 million with 5,000 employees in 2006 while NBD raked in $507 million with 1,400 staff.
Coming together
EBI Group institutions include Emirates Bank and Emirates Islamic Bank. As of March 31, total assets of EBI stood at $28.35 billion versus $20.05 billion at NBD. On the liabilities side, customer deposits were more evenly split with $14.9 billion at EBI and $13.3 billion at NBD.
While full-year profits of EBI in 2006 were $514 million, up by 9% year-on-year, NBD’s net profits were flat at $301 million. By the end of the first quarter in 2007, however, the picture was reversed as EBI reported a 4.8% lower profit of $156.5 million to March 31 when compared with a year earlier, whereas NBD boasted of a 17.5% year-on-year improvement for the first quarter to $82.25 million.
By EBI’s claims, 17 new branches were opened in the last 15 months. The group’s retail network of now 57 outlets includes Emirates Bank’s 26 branches in Dubai, six in Abu Dhabi and four in other emirates. NBD on its part also continues opening new branches and inaugurated its 40th outlet in May. Its geographic network structure entails 32 Dubai branches and eight in other emirates, similarly to the EBI network.
According to analysts, EBI staff costs jumped 45% in the first quarter of 2007 from a year earlier, due to retail network expansion and human resources investments across operations, plus an inflationary element.
The rapprochement of the two banks undoubtedly offers income opportunities to specialist firms. In one of the first international specialist reactions, a publication for UK law practitioners commented that the process created “plum mandates” for multinational law firms, Linklaters and Allen & Overy, who were commissioned by the two banks with advising on legal aspects of the merger.
But what will the cost benefits for the two entities be? EFG-Hermes estimated that the two banks would initially gain annual synergies in the range of $25 million. The potential to realize cost synergies would be limited because the two banks are likely to maintain their brands and consolidation of their branch networks will not be easy because of image concerns and guarantees to employees.
Under product and market focus angles, the two banks are compatible but their main advantages will be enhancement of their “strategic position and revenue opportunities,” EFG-Hermes said. This is also the rationale which the banks named in announcing the merger, saying that their new financial strength will allow the joint entity to compete more effectively for big deals and enhance its ability to stand up to increasing market presence from large international banks.
The sector composition of UAE banking already shows a large number of foreign banks, 25, in relation to the 21 domestic banks. However, the foreign banks until now operate under restrictions and mandates that disadvantage them in the retail market. With the implementation of international trade agreements – WTO membership as well as the free trade agreement with the US and, hopefully, the EU-GCC one – the UAE banking market will have to open up to more foreign competition.
Beginning of a new trend?
The larger question is if EBI and NBD are setting the beginning of a merger wave among UAE banks. Khaled Sifri, a well-known investment banker in the UAE and director of financial firm Rasmala Investments, doesn’t think so. All banks in the UAE make good money and currently have no compelling reasons to enter the complex processes required for a merger, Sifri told Executive.
The motive for the EBI-NBD merger is overlapping ownership, namely the stake holding and decision making authority of the Dubai government over both institutions. For EBI, the state’s stake is direct and absolute with 77% ownership. In the case of NBD, the government shareholding of 14% is augmented by stock holdings of members of the ruling family.
For both banks, the decision over a merger was not competitive in the sense that bank management on the search for a strong partner identified a merger/ takeover target from a more or less sizeable group of banks whose valuation and business structure would make them attractive. Rather, the consolidation is that of an ownership move under what Sifri described as a “legitimate political imperative. Even if two entities are privately owned, the owner can force a merger if he expects that the synergies will give greater results in future.”
Although the EBI-NBD joining caused market watchers to allege that the new size benchmark and the momentum of the step will create new support for consolidation in the UAE banking industry, analysts agreed that the move may not hasten a wave of mergers. According to Sifri, banks based in one emirate of the UAE can expand easily into any other emirate and have no strong economic imperative to favor a merger over other forms of domestic expansion. “All operate all around. If you look hard enough for potential synergies, you may find fits but this is not a standard situation and there is not a sufficient imperative in my view,” he said.
The track record of bank mergers in the global financial landscape shows that the cost of a merger is often larger than the benefits turn out to be in the end – and mergers have created some great hybrids and many unspectacular ones. The first merger in the UAE is neither humongous by size – when compared to the $80 billion ABN-Amro case – nor does it appear to be among the most complicated in a field that is admittedly hard to manage.
But, as a yardstick for a sector trend, the EBI-NBD deal is not a classic merger, and other banks planning similar nuptials will not find the union so seamless.
The mergers that would really befit GCC banks by allowing them to operate in multiple GCC countries would be cross-border mergers, Sifri said. “Those would be most justifiable because the real opportunities and value creation lies in cross-border mergers.”
